APEX MORTGAGE CAPITAL INC, 424B4, 1997-12-04

APEX MORTGAGE CAPITAL INC
424B4, 1997-12-04
FINANCE SERVICES

Previous: CODDLE CREEK FINANCIAL CORP, 8-A12G, 1997-12-04

Next: IMAGEMAX INC, 424B4, 1997-12-04

<PAGE>

FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION STATEMENT NO. 333-36069

PROSPECTUS
6,700,000 SHARES
[LOGO OF APEX MORTGAGE CAPITAL, INC.]
COMMON STOCK

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

All of the shares of common stock (the "Common Stock") offered hereby are
being sold by Apex Mortgage Capital, Inc. (the "Company"). Of the 6,700,000
shares of Common Stock offered hereby, 5,360,000 shares of Common Stock are
being offered initially in the United States by the U.S. Underwriters (the
"U.S. Offering") and the remaining 1,340,000 shares of Common Stock are being
offered concurrently by the International Managers initially outside of the
United States (the "International Offering" and, collectively, the
"Offering"). The initial public offering price and the underwriting discount
per share are identical for each Offering. At the request of the Company, the
U.S. Underwriters have reserved an aggregate of up to 500,000 shares of Common
Stock for sale at the initial public offering price to an affiliate of The TCW
Group, Inc. and directors, officers and employees of the Company, The TCW
Group, Inc. and its affiliates. Prior to the Offering, there has been no
public market for the Common Stock. See "Underwriting" for information
relating to the determination of the initial public offering price. The Common
Stock has been approved for listing, subject to official notice of issuance,
on the New York Stock Exchange under the symbol "AXM."
---------------
SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR MATERIAL RISKS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE
RISKS INCLUDE:

. The Manager may be entitled to a
. The lack of prior experience in significant termination fee which,
managing and operating a REIT if paid, would materially
could adversely affect the adversely affect the cash
Company's results of operations. available for distribution to the
Company's stockholders.

. The Company does not currently
have any borrowing arrangements or . The Company is recently formed and
commitments from any lenders and its current assets consist of
may therefore be unable to $1,500 in cash.
implement its business strategy.

. Interest rate fluctuations may
decrease net interest income from
Mortgage Assets.

. The Company's policies and
strategies may be changed without
the consent of stockholders.

. The Company has no identified . The Company intends to
Mortgage Assets to purchase and significantly leverage its
may be unable to acquire Mortgage Mortgage Assets, which may result
Assets on favorable terms. in operating losses.

. Failure to maintain REIT status
would substantially reduce the
amount of cash available for
distribution to the Company's
stockholders.

---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............. $15.00 $1.05 $13.95
- -------------------------------------------------------------------------------
Total(3).............. $100,500,000 $7,035,000 $93,465,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,000,000, payable by the Company.
The underwriting discount payable to the U.S. Underwriters for shares of
Common Stock reserved for sale to an affiliate of The TCW Group, Inc. will
be reduced by $248,080, and the net proceeds to the Company will be
increased by such amount. See "Use of Proceeds" and "Underwriting."
(3) The Company has granted to the U.S. Underwriters and the International
Managers options, exercisable within 30 days of the date hereof, to
purchase up to 804,000 and 201,000 additional shares of Common Stock,
respectively, solely to cover over-allotments, if any. If such over-
allotment options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $115,575,000,
$8,090,250, and $107,484,750, respectively. See "Underwriting."

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

The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by the
Underwriters and subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the shares of Common Stock will be
made in New York, New York on or about December 9, 1997.
---------------
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY
INCORPORATED
SUTRO & CO. INCORPORATED
---------------

The date of this Prospectus is December 3, 1997.
<PAGE>

Certain persons participating in the Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Such transactions may include stabilizing the purchase of shares of Common
Stock to cover syndicate short positions and the imposition of penalty bids.
For a description of these activities, see "Underwriting."

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

CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "INTEND,"
"CONTINUE," OR "BELIEVES" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON
OR COMPARABLE TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" IN THIS PROSPECTUS
CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING
CERTAIN RISKS AND UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
THE COMPANY TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS. SOME IMPORTANT FACTORS THAT WOULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN ANY FORWARD-LOOKING STATEMENTS INCLUDE CHANGES IN
INTEREST RATES; DOMESTIC AND FOREIGN BUSINESS, MARKET, FINANCIAL OR LEGAL
CONDITIONS; DIFFERENCES IN THE ACTUAL ALLOCATION OF THE ASSETS OF THE COMPANY
FROM THOSE ASSUMED; AND THE DEGREE TO WHICH ASSETS ARE HEDGED AND THE
EFFECTIVENESS OF THE HEDGE, AMONG OTHERS. IN ADDITION, THE DEGREE OF RISK WILL
BE INCREASED BY THE COMPANY'S LEVERAGING OF ITS ASSETS.

THE COMPANY HAS PROVIDED HYPOTHETICAL EXAMPLES OF THE MAGNITUDE OF THE
COMPENSATION PAYABLE TO THE MANAGER AND THE SIGNIFICANCE OF THE FEE PAYABLE TO
THE MANAGER UPON TERMINATION OR NON-RENEWAL OF THE MANAGEMENT AGREEMENT BY THE
COMPANY WITHOUT CAUSE. EXAMPLES RELATING TO COMPENSATION PAYABLE TO THE
MANAGER ARE SET FORTH ON PAGE 54 OF THIS PROSPECTUS. EXAMPLES RELATING TO THE
FEE PAYABLE TO THE MANAGER UPON TERMINATION OR NON-RENEWAL OF THE MANAGEMENT
AGREEMENT ARE SET FORTH ON PAGES 16 AND 52 OF THIS PROSPECTUS. THESE ARE
HYPOTHETICAL EXAMPLES ONLY AND ARE NOT PROJECTIONS. SUCH EXAMPLES ALSO
CONSTITUTE FORWARD-LOOKING STATEMENTS AND ARE BASED UPON CERTAIN ASSUMPTIONS.
ACTUAL EVENTS ARE DIFFICULT TO PREDICT AND MAY BE MATERIALLY DIFFERENT FROM
THOSE ASSUMED.

2
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 4
The Company.............................................................. 4
Summary Risk Factors..................................................... 5
The Manager.............................................................. 8
Industry Trends.......................................................... 10
Business and Strategy.................................................... 10
Mortgage Assets.......................................................... 11
Management Policies and Programs......................................... 11
Asset Acquisition Policy................................................. 11
Capital and Leverage Policy.............................................. 11
Credit Risk Management Policy............................................ 12
Asset/Liability Management Policies...................................... 12
Interest Rate Risk Management Policy.................................... 12
Prepayment Risk Management Policy....................................... 13
Dividend Policy and Distributions........................................ 13
The Offering............................................................. 14
RISK FACTORS.............................................................. 15
Lack of Prior Experience................................................. 15
No Current Borrowing Arrangements........................................ 15
Control by the Company's Board of Directors of the Company's Operating
Policies and Investment Strategies...................................... 16
No Current Mortgage Assets............................................... 16
Possible Significant Termination Fee Payable to the Manager.............. 16
Nominal Capitalization................................................... 17
Interest Rate Fluctuations May Decrease Net Interest Income.............. 17
Substantial Leverage and Potential Net Interest and Operating Losses in
Connection With Borrowings.............................................. 17
Failure to Maintain REIT Status Would Result in the Company Being Subject
to Tax as a Regular Corporation and Substantially Reduce Cash Available
for Distribution to Stockholders........................................ 18
Litigation............................................................... 19
Failure to Successfully Manage Interest Rate Risk May Adversely Affect
Results of Operations................................................... 19
Increased Levels of Prepayments from Mortgage Assets May Adversely Affect
Net Interest Income..................................................... 20
Dependence on the Manager and Its Personnel for Successful Operations.... 20
Conflicts of Interest Between the Company and the Manager and Its
Affiliates.............................................................. 20
Investment in Short-Term Investments Pending Acquisition of Mortgage
Assets May Initially Adversely Affect Results of Operations............. 21
Failure to Maintain An Exemption from the Investment Company Act Would
Adversely Affect Results of Operations.................................. 21
Absence of Public Market and No Assurance That a Public Market Will
Develop................................................................. 22
Interest Rate Fluctuations May Adversely Affect the Market Price of the
Common Stock............................................................ 22
Value of Mortgage Assets May Be Adversely Affected by Defaults on
Underlying Mortgage Obligations......................................... 22
Active Formation and Operation of Competing Mortgage REITs May Adversely
Affect the Market Price of the Common Stock............................. 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adverse Tax Treatment of Excess Inclusion Income......................... 22
Value of Mortgage Loans May Be Adversely Affected by Characteristics of
Underlying Property and Borrower Credit................................. 23
Effect of Future Offerings of Debt and Equity on Market Price of the
Common Stock............................................................ 24
Restrictions on Ownership of the Common Stock............................ 24
USE OF PROCEEDS........................................................... 26
DIVIDEND AND DISTRIBUTION POLICY.......................................... 26
CAPITALIZATION............................................................ 27
LIQUIDITY AND CAPITAL RESOURCES........................................... 27
BUSINESS AND STRATEGY..................................................... 28
General.................................................................. 28
Strategy................................................................. 28
Competition for Mortgage Assets.......................................... 30
Description of Mortgage Assets........................................... 31
Management Policies and Programs......................................... 37
Asset Acquisition Policy................................................. 37
Capital and Leverage Policy.............................................. 38
Credit Risk Management Policy............................................ 40
Asset/Liability Management Policies...................................... 41
Interest Rate Risk Management Policy.................................... 41
Prepayment Risk Management Policy....................................... 42
Mortgage Loan Securitization Techniques.................................. 42
Other Policies........................................................... 43
Future Revisions in Policies and Strategies.............................. 43
Legal Proceedings........................................................ 43
MANAGEMENT OF THE COMPANY................................................. 44
Directors and Executive Officers ........................................ 44
Executive Compensation................................................... 47
Stock Options............................................................ 47
Stock Options Outstanding................................................ 48
THE MANAGER............................................................... 49
The Management Agreement................................................. 51
Manager Compensation..................................................... 53
Expenses................................................................. 54
Certain Relationships; Conflicts of Interest............................. 56
Limits of Responsibility................................................. 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 58
FEDERAL INCOME TAX CONSEQUENCES........................................... 59
ERISA CONSIDERATIONS...................................................... 68
DESCRIPTION OF CAPITAL STOCK.............................................. 68
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS................................................................... 71
UNDERWRITING.............................................................. 74
LEGAL MATTERS............................................................. 77
EXPERTS................................................................... 77
ADDITIONAL INFORMATION.................................................... 77
GLOSSARY.................................................................. 78
AUDITORS' REPORT.......................................................... F-1
BALANCE SHEET............................................................. F-2
</TABLE>

3
<PAGE>

PROSPECTUS SUMMARY

The following summary should be read in conjunction with and is qualified in
its entirety by the more detailed information appearing elsewhere in this
Prospectus. Certain capitalized and other terms used herein shall have the
meanings assigned to them in the Glossary beginning on page 78. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment options are not exercised.

This Prospectus contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of the
information set forth under the heading "Risk Factors" and within the
Prospectus generally.

THE COMPANY

Apex Mortgage Capital, Inc. (the "Company"), a Maryland corporation, was
formed on September 15, 1997, primarily to acquire United States agency and
other highly rated, adjustable-rate, single-family real estate mortgage
securities and mortgage loans. The Company intends to structure its portfolio
to maintain a minimum weighted average rating (including deemed comparable
ratings for unrated mortgage assets based on a comparison to rated mortgage
assets with like characteristics) of at least AA or Aa by Standard & Poor's
Ratings Services ("Standard & Poor's") or Moody's Investors Service, Inc.
("Moody's"), respectively (collectively, the "Rating Agencies"). The Company
will use its equity capital and borrowed funds to seek to generate income based
on the difference between the yield on its mortgage assets and the cost of its
borrowings. The Company will elect to be taxed as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"). The Company will not generally be subject to federal taxes on its
income to the extent that it distributes its net income to its stockholders and
maintains its qualification as a REIT. See "Federal Income Tax Consequences--
Requirements for Qualification as a REIT--Distribution Requirement."

The goal of the Company is to be an efficient investor in mortgage assets.
The Company anticipates that it will acquire mortgage assets primarily in the
secondary mortgage market through the operational experience and market
relationships of TCW Investment Management Company (the "Manager") and its
Affiliates. See "Business and Strategy--Management Policies and Programs--Asset
Acquisition Policy" and "The Manager."

The day-to-day operations of the Company will be managed by the Manager
subject to the direction and oversight of the Company's Board of Directors, a
majority of whom will be unaffiliated with The TCW Group, Inc. ("TCW" and,
together with its subsidiaries and Affiliates, the "TCW Group") or the Manager.
The Manager is a wholly-owned subsidiary of TCW. The Manager was established in
1992 and the TCW Group began operations in 1971 through one of its affiliates.
The Company's investment management team will be selected members of the TCW
Group's Mortgage-Backed Securities Group (the "MBS Group"), all of whom have
over ten years of experience in raising and managing mortgage capital. See
"Management of the Company--Directors and Executive Officers" and "The
Manager." The Company has elected to be externally managed by the Manager,
which has not previously managed a REIT, to take advantage of the existing
operational systems, expertise and economies of scale associated with the
Manager's current business operations. In addition, the TCW Group, which is the
existing stockholder of the Company, currently owns the Manager and will
benefit from any management fees payable to the Manager. There can be no
assurance that the past experience of the executive officers of the Company and
the Manager will be appropriate to the business of the Company. Further, the
experience of the Manager and the TCW Group should not be viewed as a reliable
gauge of the potential success of the Company. See "Risk Factors--Lack of Prior
Experience." The Company has no ownership interest in the Manager.

The Company's mortgage assets will consist primarily of adjustable-rate
mortgage securities ("Mortgage Securities"), including adjustable-rate
collateralized mortgage obligations ("CMOs"), bearing interest rates that
adjust periodically based on changes in short-term market interest rates.
However, fixed-rate mortgage assets may also be acquired generally in
combination with hedging instruments, including interest rate derivative
instruments, to obtain investment characteristics similar to adjustable-rate
Mortgage Securities. The Company

4
<PAGE>

generally intends to hold its mortgage assets to maturity. In addition, the
Company may from time to time, depending on market conditions, acquire whole
loans ("Mortgage Loans") from mortgage conduits and mortgage loan originators,
which the Company may use as collateral to create its own Mortgage Securities.
Pending full investment in the desired mix of Mortgage Securities and Mortgage
Loans, funds will be committed to certain short-term investments ("Short-Term
Investments" and, together with Mortgage Securities and Mortgage Loans,
"Mortgage Assets").

The Company will finance the purchase of its Mortgage Assets with the net
proceeds of the Offering and short-term borrowings (primarily reverse
repurchase agreements) of up to 92% of total Mortgage Assets. The Company will
attempt to structure its borrowings to have interest rate indices and interest
rate adjustment periods that generally correspond (in the aggregate for the
entire portfolio, and not on an asset-by-asset basis) to the interest rate
adjustment indices and interest rate adjustment periods of its Mortgage Assets.

In general, the Company intends to hedge the lifetime cap risk associated
with its adjustable-rate Mortgage Assets. The Company's policy initially will
be to seek to limit the effective interest rate on substantially all of its
liabilities to a rate equal to the weighted average lifetime cap of its
adjustable-rate Mortgage Assets. Under current market conditions, the Company
does not intend to enter into transactions to hedge its periodic cap risk. The
Company currently intends to manage the periodic cap risk through its leverage
and asset/liability policies. This may negatively impact earnings during
periods of rapidly rising short-term interest rates. However, the Company
believes this is the most cost-efficient hedging strategy in the current market
environment. See "Risk Factors--Interest Rate Fluctuations May Decrease Net
Interest Income."

SUMMARY RISK FACTORS

Each prospective purchaser of the Common Stock offered hereby should review
"Risk Factors" beginning on page 15 for a discussion of material risks that
should be considered before investing in the Common Stock, including the
following:

. Lack of Prior Experience. The lack of prior experience of the Company
and the Manager in managing and operating a REIT could adversely affect
the Company's business, financial condition and results of operations.

. No Current Borrowing Arrangements. The Company does not currently have
any borrowing arrangements or commitments from any lenders. If the
Company does not obtain financing arrangements on terms and conditions
satisfactory to the Company, the Company will not have access to
sufficient capital to finance the Company's business strategy as
described herein.

. Control by the Company's Board of Directors of the Company's Operating
Policies and Investment Strategies. The Company's investment, financing
and operating policies and strategies will be determined by the
Company's Board of Directors and may be changed at any time without the
consent or approval of the Company's stockholders. Such changes may
adversely affect the Company's results of operations.

. No Current Mortgage Assets. The Company has not identified any Mortgage
Assets to purchase with the net proceeds of the Offering. The Company's
Net Income will depend on the Manager's ability to acquire Mortgage
Assets on acceptable terms and at favorable spreads over the Company's
borrowing costs. If the Manager is unable to acquire Mortgage Assets on
favorable terms and conditions, the Company's results of operations will
be adversely affected.

. Possible Significant Termination Fee Payable to the Manager. The Manager
may be entitled to a significant termination fee if the Company does not
renew, or elects to terminate, the Management Agreement which, if paid,
would materially adversely affect the cash available for distribution to
the Company's stockholders and may result in material net operating
losses for the period. See "The Manager--Management Agreement."

5
<PAGE>

. Nominal Capitalization. The Company is recently formed and currently has
only nominal capitalization, consisting of $1,500 in cash. Consequently,
the Company's operations are dependent on the net proceeds of the
Offering and borrowings in order to commence its business operations.
See "Capitalization."

. Interest Rate Fluctuations May Decrease Net Interest Income. The
Company's operations will be affected substantially by prevailing market
interest rates and borrowing costs, which are determined in large part
by market conditions and governmental policies beyond the control of the
Company and the Manager. To the extent the Company's cost of borrowings
rise more rapidly than the yields on its Mortgage Assets funded by such
borrowings, the Company's net interest income may be reduced or a net
loss may result.

. Substantial Leverage and Potential Net Interest and Operating Losses in
Connection With Borrowings. The Company intends to increase the size of
its Mortgage Asset portfolio by employing a leveraging strategy of
borrowing up to 92% against its total Mortgage Asset portfolio to
finance the acquisition of additional Mortgage Assets. The Company will
experience negative cash flow and incur losses if borrowing costs exceed
the income on its Mortgage Assets.

. Failure to Maintain REIT Status Would Result in Company Being Subject to
Tax as a Regular Corporation. The Company must at all times maintain
substantially all of its investments in, and otherwise conduct its
business in a manner consistent with, the REIT Provisions of the Code.
If the Company fails to qualify as a REIT, it would be treated as a
regular corporation and would be subject to income tax that would result
in a substantial reduction of cash available for distribution to
stockholders of the Company.

. Litigation. A mortgage company with a similar name recently filed suit
against the Company demanding that the Company not operate under the
name "Apex Mortgage Capital." The Company successfully defended an
action for a temporary restraining order to prohibit the Company from
using such name. Although such decision was not dispositive, the
plaintiff company has taken no further action to date. The Company will
continue to evaluate the merits of the plaintiff's case, but no decision
has been made as to how the Company will respond to further actions, if
any. If any such litigation is pursued, the Company may be required to
change its name and thereby incur expenses, may be required to pay
damages or may incur substantial litigation costs even if the Company is
successful. As a result of such litigation the Company's results of
operations may be adversely affected.

. Failure to Successfully Manage Interest Rate Risks May Adversely Affect
Results of Operations. Developing an objective interest rate risk
strategy is complex and no strategy can completely insulate the Company
from risks associated with interest rate changes. Hedging strategies
involve risk and may not be successful in reducing the Company's
exposure to changing interest rates.

. Increased Levels of Prepayments from Mortgage Assets May Adversely
Affect Net Interest Income. In the event that the Company's Mortgage
Assets are prepaid prior to maturity, the Company may (i) have held the
Mortgage Assets while it was less profitable and lost the opportunity to
receive interest at the fully-indexed rate, (ii) need to write-off
capitalized premium amounts, and (iii) be unable to acquire new Mortgage
Assets to replace the prepaid Mortgage Assets. Mortgage prepayment rates
vary depending on market interest rates. Changes in prepayments could
cause declines in the Company's Net Income.

. Dependence on the Manager and Its Personnel for Successful
Operations. The Company will be dependent on the Manager, and its
operations will depend initially entirely upon the contributions of
Philip Barach, Jeffrey Gundlach, Daniel Osborne, Joseph Galligan and
other key personnel of the Manager. The loss of any key person could
have a material adverse effect on the Company's business.

6
<PAGE>

. Conflicts of Interest Between the Company and the Manager and Its
Affiliates. Affiliates of the Manager invest and will continue to invest
in Mortgage Securities on behalf of their clients. As a consequence,
there may be a conflict of interest between the operations of the
Manager and the operations of its Affiliates in the acquisition and
disposition of Mortgage Securities. Such conflicts may result in
decisions and/or allocations of Mortgage Securities by Affiliates of the
Manager that are not in the best interests of the Company. In addition,
the Manager may advise other mortgage-related entities unaffiliated with
the Company.

. Initial Investment in Short-Term Investments. Following the closing of
the Offering, the Company will initially invest a substantial portion of
the net proceeds from the Offering in Short-Term Investments pending
acquisition of other Mortgage Assets. The Company's results of
operations initially may be adversely affected pending purchase of
Mortgage Securities and Mortgage Loans and implementation of its Capital
and Leverage Policy. The Company anticipates that it may take up to 15
months to fully implement its leveraging strategy.

7
<PAGE>

THE MANAGER

The Manager will be responsible for the day-to-day operations of the Company
and will perform such services and activities relating to the Mortgage Assets
and operations of the Company as may be appropriate. At all times, the Manager
will be subject to the direction and oversight of the Company's Board of
Directors and will have only such functions and authority as the Company may
delegate to it. The Manager will be primarily involved in two activities: (i)
asset/liability management--acquisition, financing, hedging, management and
disposition of Mortgage Assets, including credit and prepayment risk
management; and (ii) capital management--structuring, analysis, capital raising
and investor relations activities. In conducting these activities, the Manager
will formulate operating strategies for the Company, arrange for the
acquisition of Mortgage Assets by the Company, arrange for various types of
financing for the Company, monitor the performance of the Company's Mortgage
Assets and provide certain administrative and managerial services in connection
with the operation of the Company. The Manager will be required to manage the
business affairs of the Company in conformity with the policies that are
approved and monitored by the Company's Board of Directors. The Manager will be
required to prepare regular reports for the Company's Board of Directors, which
will review the Company's acquisitions of Mortgage Assets, portfolio
composition and characteristics, credit quality, performance and compliance
with policies previously approved by the Company's Board of Directors. See "The
Manager--The Management Agreement" and "Business and Strategy--Management
Policies and Programs."

The Manager has not previously managed a REIT. In particular, the Manager has
not previously managed a highly-leveraged pool of Mortgage Assets nor does the
Manager have experience in complying with the asset limitations imposed by the
REIT Provisions of the Code. Although management of the Company and the Manager
have experience in managing mortgage capital, there can be no assurance that
the past experience of the executive officers of the Company and the Manager
will be appropriate to the business of the Company. Further, the experience of
the Manager and the TCW Group should not be viewed as a reliable gauge of the
potential success of the Company. See "Risk Factors--Lack of Prior Experience."

Pursuant to a management agreement (the "Management Agreement") between the
Company and the Manager, the Company will pay the Manager annual base
management compensation based on Average Net Invested Capital, payable monthly
in arrears, equal to 3/4 of 1% of the Average Net Invested Capital of the
Company. "Average Net Invested Capital" means for any period (i) the arithmetic
average of the sum of the gross proceeds of the offerings of its equity
securities by the Company, after deducting any underwriting discounts and
commissions and other expenses and costs relating to such offerings, plus the
Company's retained earnings (taking into account any losses incurred) and any
non-cash charges or reserves, including depreciation, mark-to-market
adjustments and unrealized credit loss, computed by taking the average of such
values at the end of each month during such period, plus (ii) any unsecured
debt approved by the Unaffiliated Directors (defined as directors who are not
affiliated with, employed by, or officers or directors of the Manager or the
TCW Group or employed by or officers of the Company) to be included in Average
Net Invested Capital. Accordingly, incurring collateralized debt to finance
specific investment purchases does not increase Average Net Invested Capital.

The Company will also pay the Manager, as incentive compensation for each
fiscal quarter, an amount equal to 30% of the Net Income of the Company, before
incentive compensation, in excess of the amount that would produce an
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate (average
of weekly average yield to maturity for U.S. Treasury securities (adjusted to a
constant maturity of 10 years), as published weekly by the Federal Reserve
Board during a quarter) plus 1%. A deduction for the Company's interest
expenses for borrowed funds is taken into account in calculating Net Income.
"Return on Equity" is computed for any quarter by dividing the Company's Net
Income for the quarter by its Average Net Worth for the quarter and has no
necessary correlation with the actual distributions received by stockholders or
with an individual investor's actual return on investment. The incentive
compensation calculation and payment to the Manager will be made quarterly in
arrears, and will be subject to an annual adjustment commencing in the second
full calendar year of the operations of the Company. See "The Manager--Manager
Compensation" for a more detailed explanation

8
<PAGE>

of the management compensation arrangements and the "Glossary" for definitions
of the terms "Average Net Worth," "Net Income" and "Return on Equity." The
Company believes that this compensation arrangement benefits stockholders
because it ties the Manager's compensation to Return on Equity and, in periods
of low earnings, the Manager's incentive compensation is reduced or eliminated,
thereby lowering the Company's operating expenses.

The Company will enter into the Management Agreement with the Manager at the
closing of the Offering for an initial term of two years. Thereafter, the
Management Agreement may be renewed for additional one-year terms at the
discretion of the Unaffiliated Directors, unless previously terminated by the
Company or the Manager upon written notice. Except in the case of a termination
or non-renewal by the Company for cause, upon termination or non-renewal of the
Management Agreement by the Company, the Company is obligated to pay the
Manager a termination or non-renewal fee equal to the fair market value of the
Management Agreement without regard to the Company's termination or non-renewal
right as determined by an independent appraisal. The selection of the
independent appraiser shall be subject to the approval of the Unaffiliated
Directors. The payment of such a termination or non-renewal fee by the Company
would adversely affect the cash available for distribution to the Company's
stockholders and may have a material adverse effect on the Company's
operations. See "The Manager--The Management Agreement" and "Risk Factors--
Possible Significant Termination Fee Payable to the Manager."

The structure and relationships of the Company, the Manager and their
respective shareholders, before and after the Offering, is as follows:

[ORGANIZATIONAL CHART OF THE COMPANY INDICATING THE RELATIONSHIP BETWEEN THE
COMPANY AND ITS SHAREHOLDERS]

[CHART]

(1) TCW Asset Management Company ("TAMCO"), a direct subsidiary of The TCW
Group, Inc., is the owner of the initial 100 shares of Common Stock of the
Company currently outstanding. See "Security Ownership of Certain
Beneficial Owners and Management." Following the completion of the
Offering, TAMCO will continue to own only 100 shares of Common Stock of the
Company. The remaining 6,700,000 shares of Common Stock will be acquired in
the Offering. Up to 500,000 shares of Common Stock have been reserved at
the initial public offering price to an affiliate of TCW and directors,
officers and employees of the Company, The TCW Group, Inc. and certain of
its affiliates.

(2) TCW Investment Management Company is a direct subsidiary of The TCW Group,
Inc.

(3) Upon the closing of the Offering, the Company will enter into a Management
Agreement with TCW Investment Management Company. See "The Manager--The
Management Agreement."

9
<PAGE>

INDUSTRY TRENDS

The Company believes that the growth of the secondary mortgage market,
including new securitization techniques, has resulted in financing structures
that can be utilized efficiently to fund leveraged mortgage portfolios and
better manage interest rate risk. As a REIT, the Company can generally pass-
through earnings to stockholders without incurring an entity-level federal
income tax, thereby potentially allowing the Company to pay higher dividends
than traditional financial institutions and mortgage banking competitors that
are subject to federal income tax on their earnings. See "Federal Income Tax
Consequences--Taxation of the Company."

The residential mortgage market has experienced considerable growth over the
past 15 years with total residential mortgage debt outstanding growing from
approximately $965 billion in 1980 to approximately $3.9 trillion in 1996,
according to the Mortgage Market Statistical Annual for 1997. In addition, the
total residential mortgage debt securitized into Mortgage Securities has grown
from approximately $110 billion in 1980 to approximately $1.9 trillion in 1996,
according to the same source. The Company believes that the current size of the
residential mortgage market will provide it with significant opportunities with
respect to the purchase of Mortgage Assets.

BUSINESS AND STRATEGY

The Company's principal business objective is to produce net interest income
on its Mortgage Assets while maintaining a cost efficient organizational
structure in order to generate Net Income for distribution to its stockholders.
To achieve its business objective and generate dividend yields that provide a
competitive rate of return for stockholders, the Company's strategy is to:

. purchase primarily single-family Mortgage Assets, the majority of which
are currently expected to have adjustable interest rates based on
changes in short-term market interest rates;

. manage the credit risk of its Mortgage Assets through, among other
activities, (i) carefully selecting Mortgage Assets to be acquired, (ii)
complying with the Company's policies with respect to credit risk
concentration which, among other things, will require the Company to
maintain a Mortgage Asset portfolio with a weighted average rating
generally equivalent to AA (or a comparable rating) or better, (iii)
actively monitoring the ongoing credit quality and servicing of its
Mortgage Assets, and (iv) maintaining appropriate capital levels and
allowances for possible credit losses;

. finance purchases of Mortgage Assets with the net proceeds of equity
offerings and, to the extent permitted by the Company's Capital and
Leverage Policy, to utilize leverage to increase potential returns to
stockholders through borrowings (primarily reverse repurchase
agreements) with interest rates that will also reflect changes in short-
term market interest rates;

. seek to structure its borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate
hedged basis, generally correspond to the interest rate adjustment
indices and interest rate adjustment periods of its adjustable-rate
Mortgage Assets;

. utilize interest rate caps, swaps and similar financial instruments to
mitigate the risk of the cost of its variable-rate liabilities exceeding
the earnings on its Mortgage Assets during a period of rising interest
rates;

. seek to minimize prepayment risk primarily by structuring a diversified
portfolio with a variety of prepayment characteristics; and

. apply securitization techniques designed to enhance the value and
liquidity of the Company's Mortgage Assets acquired in the form of
Mortgage Loans by securitizing them into Mortgage Securities tailored to
the Company's investment objectives.

See "Business and Strategy--Management Policies and Programs" below for
further discussion of the Company's strategies. There can be no assurance that
the Company will successfully implement its strategies. See "Risk Factors" for
a discussion of factors that could adversely affect the Company's ability to
successfully implement its strategies.

10
<PAGE>

MORTGAGE ASSETS

The Company will primarily acquire United States agency and other High
Quality adjustable-rate Mortgage Assets. "High Quality" shall mean either (i)
Mortgage Securities that are rated A or above by at least one of the Rating
Agencies or (ii) Mortgage Securities that are unrated, but are either
obligations of the United States or obligations guaranteed by the United States
government or an agency or instrumentality of the United States government. The
Company intends to acquire Mortgage Assets in the secondary mortgage market
through the operational experience and market relationships of the Manager and
its Affiliates.

The Mortgage Assets to be purchased by the Company will consist primarily of
Mortgage Securities and Mortgage Loans secured by single-family residential
real estate. The Company expects that primarily all of its Mortgage Assets will
bear interest at adjustable rates. However, fixed-rate Mortgage Assets may also
be acquired generally in combination with hedging instruments to obtain
investment characteristics similar to adjustable-rate Mortgage Assets. The
Company anticipates that a significant portion of the Mortgage Assets it
acquires will not be fully indexed (i.e., will bear interest at initial
"teaser" rates).

The Company will generally not acquire Inverse Floaters, REMIC Residuals or
First Loss Subordinated Bonds. The Company may acquire mortgage derivative
securities, including, but not limited to, interest only, principal only or
other Mortgage Securities that receive a disproportionate share of interest
income, or principal, either as an independent stand-alone investment
opportunity or to assist in the management of prepayment and other risks
(collectively, "Mortgage Derivative Securities"), but only on a limited basis
due to the greater risk of loss associated with Mortgage Derivative Securities.
See "Risk Factors--Failure to Successfully Manage Interest Rate Risks May
Adversely Affect Results of Operations."

MANAGEMENT POLICIES AND PROGRAMS

ASSET ACQUISITION POLICY

The Company will only acquire Mortgage Assets that are consistent with its
balance sheet guidelines and risk management objectives. Since the intention of
the Company is generally to hold its Mortgage Assets until maturity, the
Company generally will not seek to acquire Mortgage Assets with investment
returns that are attractive only in a limited range of scenarios. The Company
believes that future interest rates and mortgage prepayment rates are very
difficult to predict. Therefore, the Company will seek to acquire Mortgage
Assets that it believes will provide competitive returns over a broad range of
interest rate and prepayment scenarios.

The Company will acquire Mortgage Assets that it believes will maximize
returns on capital invested, after considering (i) the amount and nature of the
anticipated cash flow from the Mortgage Assets, (ii) the Company's ability to
pledge Mortgage Assets to secure collateralized borrowings, (iii) the increase
in the Company's capital requirement determined by the Company's Capital and
Leverage Policy resulting from the purchase and financing of Mortgage Assets,
(iv) the costs of financing, hedging, managing, securitizing and reserving for
Mortgage Assets, and (v) the Company's credit risk management policy. Prior to
acquisition of a Mortgage Asset, potential returns on capital employed are
assessed over the life of the Mortgage Asset and in a variety of interest rate,
yield spread, financing cost, credit loss and prepayment scenarios.

CAPITAL AND LEVERAGE POLICY

The Company's goal is to strike a balance between the under-utilization of
leverage, which reduces potential returns to stockholders, and the over-
utilization of leverage, which could reduce the Company's ability to meet its
obligations during periods of adverse market conditions. The Company has
established a Capital and Leverage Policy that limits its ability to acquire
additional Mortgage Assets during times when the capital base of the Company is
less than a required amount defined in the Capital and Leverage Policy. In this
way, the use of

11
<PAGE>

balance sheet leverage is better controlled. The capital base required for the
purpose of the Capital and Leverage Policy is equal to the market value of the
Company's total Mortgage Assets less the book value of total collateralized
borrowings. The actual capital base, as so defined, represents the approximate
liquidation value of the Company and approximates the market value of the
Mortgage Assets that can be pledged or sold to meet over-collateralization
requirements for the Company's borrowings. The unpledged portion of the
Company's actual capital base is available to be pledged or sold as necessary
to maintain over-collateralization levels for the Company's borrowings. Under
current market conditions, the Company will seek to maintain a capital base of
at least 10% of Mortgage Assets as an operating policy; if the capital base
falls below 8%, the Company will not acquire net additional Mortgage Assets. In
addition, in the event the Company's capital base falls below 8%, the Manager
will present a plan to the Company's Board of Directors designed to bring the
Company back to its target capital-to-assets ratio. It is anticipated that in
many circumstances this goal will be achieved over time without active
management through the natural process of mortgage principal repayments and
increases in the market values of Mortgage Assets as their coupon rates adjust
upwards to market levels.

CREDIT RISK MANAGEMENT POLICY

The Company will review credit risk and other risks of loss associated with
each Mortgage Asset acquisition that is not guaranteed by Fannie Mae, FHLMC or
GNMA and determine the appropriate allocation of capital to apply to such
investment. In addition, the Company will attempt to diversify its Mortgage
Asset portfolio to avoid undue geographic, insurer and other types of
concentrations. The Company's Board of Directors will monitor the overall risk
of the Mortgage Asset portfolio and determine appropriate levels of provision
for loss.

The Company anticipates that at least 75% of its Mortgage Assets will be
comprised of High Quality adjustable-rate Mortgage Securities. In addition, the
Company anticipates further that at least 50% of its Mortgage Assets will be
invested in Mortgage Securities that are either rated AAA or have a comparable
rating by at least one of the Rating Agencies or are obligations of or are
guaranteed by the United States government or an agency or instrumentality
thereof. The Company anticipates that its investment in Mortgage Loans or other
Mortgage Securities that are not High Quality under the criteria set forth
above ("Other Mortgage Assets") will be limited to 25% of its Mortgage Assets.
However, the Company's investment in Other Mortgage Assets will be restricted
to Mortgage Assets that are unrated or whose ratings have not been updated, but
are determined by the Manager to be of comparable quality to a High Quality
Mortgage Security. This determination will be made on the basis of credit or
other enhancement features that meet the High Quality credit criteria as
determined by the Manager and approved by the Company's Board of Directors,
including approval by a majority of the Unaffiliated Directors. The Company
intends to structure its Mortgage Asset portfolio to maintain a minimum
weighted average rating (including the Manager's deemed comparable ratings for
unrated Mortgage Assets based on a comparison to rated Mortgage Securities with
like characteristics) of at least AA (or a comparable rating) by at least one
of the Rating Agencies. However, there can be no assurance that such structure
will be achieved. The Company will not be obligated to liquidate any Mortgage
Assets to achieve its desired weighted average rating.

Compliance with the credit risk management policy guidelines shall be
determined at the time of purchase of Mortgage Assets (based on the most recent
valuation utilized by the Company) and will not be affected by events
subsequent to such purchase, including, without limitation, changes in
characterization, value or rating of any specific Mortgage Assets or economic
conditions or events generally affecting any Mortgage Assets of the type held
by the Company.

ASSET/LIABILITY MANAGEMENT POLICIES

Interest Rate Risk Management Policy

To the extent consistent with its election to qualify as a REIT, the Company
will follow an interest rate risk management policy intended to mitigate the
negative effects of major interest rate changes. The Company intends

12
<PAGE>

to minimize its interest rate risk from borrowings by attempting to match the
maturity of its borrowings to the interest rate adjustment periods on its
Mortgage Assets. Under normal market conditions, the Company will attempt to
keep the difference between the weighted average time to "reset" on its
Mortgage Assets to the weighted average time to reset on its borrowings to 90
days or less, taking into account all hedging transactions, although there can
be no assurance that the Company will be able to so limit such "reset" periods.
This interest rate risk management policy will be reviewed by the Company's
Board of Directors if the Company incurs long-term non-callable borrowings and
as market conditions change. In addition to "reset" periods, the Company also
intends to manage differences in interest rate indices between its Mortgage
Assets and borrowings. See "Risk Factors--Failure to Successfully Manage
Interest Rate Risks May Adversely Affect Results of Operations."

The Company's interest rate risk management policy is formulated with the
intent to offset the potential adverse effects resulting from rate adjustment
limitations on its Mortgage Assets and the differences between interest rate
adjustment indices and interest rate adjustment periods of its adjustable-rate
Mortgage Assets and related borrowings. The Company anticipates being able to
adjust the average maturity period of such borrowings on an ongoing basis by
changing the mix of maturities and interest rate adjustment periods as
borrowings come due and are renewed. Through use of these procedures, the
Company will seek to minimize differences between interest rate adjustment
periods of adjustable-rate Mortgage Assets and related borrowings that may
occur.

In general, the Company intends to mitigate the lifetime cap risk associated
with its adjustable-rate Mortgage Assets. The policy will be to attempt to
limit the effective interest rate on substantially all of the Company's
liabilities as a whole to a rate equal to the weighted average lifetime cap of
its adjustable-rate Mortgage Assets. Under current market conditions, the
Company does not intend to enter into transactions to mitigate its periodic cap
risk. The Company intends to manage this risk through its leverage and
asset/liability policies.

In all of its interest rate risk management transactions, the Company will
follow certain procedures designed to limit credit exposure to Counter-parties,
including entering into contracts only with Counter-parties rated investment
grade by a nationally recognized rating service. See "Business and Strategy--
Management Policies and Programs--Asset/Liability Management Policies" and "--
Interest Rate Risk Management Policy." In addition, all hedging transactions
will be monitored for compliance with the REIT Provisions of the Code and other
applicable laws.

Prepayment Risk Management Policy

The Company's prepayment risk management policy is formulated with the
purpose of mitigating the potential adverse effects resulting from faster than
anticipated prepayment rates on its Mortgage Assets. The Company intends to
invest in Mortgage Assets that on a portfolio basis do not have significant
purchase price premiums. Under normal market conditions, the Company will seek
to keep the aggregate capitalized purchase premium of the Mortgage Assets
portfolio to 3% or less.

Although the Company believes that it has developed a cost-effective set of
asset/liability management policies to help mitigate interest rate and
prepayment risks, no strategy can completely insulate the Company from the
effects of interest rate changes, prepayments and defaults by Counter-parties.
Further, certain of the federal income tax requirements that the Company must
satisfy to qualify as a REIT limit its ability to fully hedge its interest rate
and prepayment risks. See "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Gross Income Tests."

DIVIDEND POLICY AND DISTRIBUTIONS

To maintain its qualification as a REIT, the Company intends to make annual
distributions to its stockholders of at least 95% of Taxable Income (which does
not necessarily equal net income as calculated in

13
<PAGE>

accordance with generally accepted accounting principals ("GAAP")), determined
without regard to the deduction for dividends paid and by excluding any net
capital gains. Any Taxable Income remaining after the distribution of regular
quarterly dividends will be distributed annually in a special dividend on or
prior to the date of the first regular quarterly dividend payment of the
following taxable year. The dividend policy is subject to revision at the
discretion of the Company's Board of Directors. All distributions in excess of
those required for the Company to maintain REIT status will be made by the
Company at the discretion of the Board of Directors and will depend on the
taxable earnings of the Company, its financial condition and such other factors
as the Board of Directors deems relevant. The Company's Board of Directors has
not established a minimum dividend level.

THE OFFERING

<TABLE>
<C> <S>
Common Stock Offered:
U.S. Offering................. 5,360,000
International Offering........ 1,340,000
Total..................... 6,700,000
Common Stock to be Outstanding
After the Offering.............. 6,700,100 shares(1)(2)
Use of Net Proceeds.............. Purchase of the Company's initial portfolio
of Mortgage Assets(3)
Proposed NYSE Symbol............. "AXM"
</TABLE>
- --------
(1) Assumes that the Underwriters' options to purchase up to an additional
1,005,000 shares to cover over-allotments are not exercised. See
"Underwriting."

(2) Includes 100 shares of Common Stock issued to TCW Capital Investment
Corporation (and subsequently transferred to TAMCO) in connection with the
initial organization of the Company. Excludes 1,000,000 shares of Common
Stock reserved for issuance under the Company's 1997 Stock Option Plan.
Options to acquire 300,000 shares of Common Stock have been granted to the
executive officers of the Company and employees of the Manager and options
to acquire 100,000 shares of Common Stock have been granted to the
Unaffiliated Directors. See "Management of the Company--Stock Options."

(3) The Company may require up to six months to have the net proceeds of the
Offering fully invested in Mortgage Assets and up to an additional nine
months to fully implement the leveraging strategy to increase the Mortgage
Asset investments to its desired level. Pending full investment in the
desired mix of Mortgage Assets, funds will be committed to Short-Term
Investments that are expected to provide a lower net return than the
Company hopes to achieve from its intended primary Mortgage Asset
investments. See "Risk Factors--Investment in Short-Term Investments
Pending Acquisition of Mortgage Assets May Initially Adversely Affect
Results of Operations."

14
<PAGE>

RISK FACTORS

Before investing in the shares of Common Stock offered hereby, prospective
investors should give special consideration to the information set forth
below, in addition to the information set forth elsewhere in this Prospectus.
The following risk factors are interrelated and, consequently, investors
should treat such risk factors as a whole. This Prospectus may contain
forward-looking statements that may be identified by the use of forward-
looking terminology such as "may," "will," "should," "expect," "anticipate,"
"estimate," "intend," "continue," or "believes" or the negative thereof or
other variations thereon or comparable terminology. The matters set forth
under "Risk Factors" constitute cautionary statements identifying important
factors with respect to any forward-looking statements, including certain
risks and uncertainties, that could cause actual results to differ materially
from those in such forward-looking statements.

An investment in the Company involves various risks, including the risk that
an investor can lose capital. There is no guarantee that the Company can
successfully implement its business strategy, reach its investment objectives
or achieve a positive return for stockholders. In addition to the information
set forth elsewhere in this Prospectus, the following risk factors should be
considered.

LACK OF PRIOR EXPERIENCE

Neither the Company nor the Manager have previously managed or operated a
REIT or other public company. In particular, the Manager has not previously
managed a highly-leveraged pool of Mortgage Assets nor does the Manager have
experience in complying with the asset limitations imposed by the REIT
Provisions of the Code. This lack of prior experience could adversely affect
the Company's business, financial conditions and results of operations. The
Company will commence substantive operations upon the closing of the Offering
and, accordingly, has not yet developed any financial or operating history or
experienced interest rate fluctuations or market conditions.

NO CURRENT BORROWING ARRANGEMENTS

The Company does not currently have any borrowing arrangements or
commitments from any lenders. If the Company does not obtain financing
arrangements, it will not have access to sufficient capital to finance its
business strategy.

The Company will rely on short-term borrowings to fund acquisitions of
Mortgage Assets. Accordingly, the ability of the Company to achieve its
investment objectives depends on its ability to borrow money in sufficient
amounts and on favorable terms and on its ability to renew or replace on a
continuous basis maturing short-term borrowings. In addition, the Company may
be dependent upon a few lenders to provide the primary credit facilities for
its Mortgage Asset purchases. Any failure to obtain or renew adequate funding
under these facilities or other financings on favorable terms could have a
material adverse effect on the Company's operations.

In the event the Company is not able to renew or replace maturing
borrowings, it could be required to sell Mortgage Assets under adverse market
conditions and could incur permanent capital losses as a result. In addition,
in such event, the Company may be required to terminate hedge positions, which
could result in further losses. Any event or development such as a sharp rise
in interest rates or increasing market concern about the value or liquidity of
a type or types of Mortgage Assets in which the Company's Mortgage Asset
portfolio is concentrated will reduce the market value of the Mortgage Assets,
which would likely cause lenders to require additional collateral. A number of
such factors in combination may cause difficulties for the Company, including
a possible liquidation of a major portion of its Mortgage Assets at
disadvantageous prices with consequent losses, which would have a material
adverse effect on the Company and could render it insolvent.

Substantially all of the Company's Mortgage Assets can be expected to be
pledged to secure reverse repurchase agreements, bank borrowings or other
credit arrangements. Therefore, such Mortgage Assets may not

15
<PAGE>

be available to the stockholders in the event of the liquidation of the
Company, except to the extent that the market value thereof exceeds the
amounts due to the Company's creditors. The market value of the Mortgage
Assets will fluctuate as a result of numerous market factors (including
interest rates and prepayment rates) as well as the supply of and demand for
such Mortgage Assets. In the event of the bankruptcy of a counter-party with
whom the Company has a reverse repurchase agreement, the Company might
experience difficulty recovering its pledged Mortgage Assets, which may
adversely affect the Company's results of operations.

CONTROL BY THE COMPANY'S BOARD OF DIRECTORS OF THE COMPANY'S OPERATING
POLICIES AND INVESTMENT STRATEGIES

The Company has established the operating policies and strategies set forth
in this Prospectus as the operating policies and strategies of the Company.
However, these policies and strategies may be modified or waived by the Board
of Directors without the consent or approval of the Company's stockholders.
The ultimate effect of any such changes is uncertain. See "Business and
Strategy."

NO CURRENT MORTGAGE ASSETS

The Company has not identified any Mortgage Assets to purchase with the net
proceeds of the Offering. The Company's Net Income will depend on its ability
to acquire Mortgage Assets on acceptable terms and at favorable spreads over
the Company's borrowing costs. If the Company is unable to acquire Mortgage
Assets, its results of operations will be adversely affected.

In acquiring Mortgage Assets, the Company will compete with other REITs,
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, Fannie Mae, FHLMC,
GNMA and other entities purchasing Mortgage Assets, some of which have greater
financial resources than the Company. In addition, there are several REITs
similar to the Company, and others may be organized in the future. The effect
of the existence of additional REITs may be to increase competition for the
available supply of Mortgage Assets suitable for purchase by the Company.
Increased competition for the acquisition of eligible Mortgage Assets or a
diminution in the supply could result in higher prices and, thus, lower yields
on such Mortgage Assets that could further narrow the yield spread over
borrowing costs.

The availability of Mortgage Assets meeting the Company's criteria is
dependent upon, among other things, the size of and level of activity in the
residential real estate lending market, which depend on various factors,
including the level of interest rates, regional and national economic
conditions and inflation and deflation in residential real estate values. To
the extent the Company is unable to acquire a sufficient volume of Mortgage
Assets meeting its criteria, the Company's results of operations would be
adversely affected.

POSSIBLE SIGNIFICANT TERMINATION FEE AVAILABLE TO THE MANAGER

The Manager may be entitled to a significant termination fee if the Company
does not renew, or elects to terminate, the Management Agreement, which, if
paid, would materially adversely affect the cash available for distribution to
the Company's stockholders and may result in material net operating losses for
the period. Based on certain estimates and assumptions, the termination fee
may be as high as $18.8 million. See "The Manager--The Management Agreement."

16
<PAGE>

NOMINAL CAPITALIZATION

The Company was recently organized and currently has only nominal
capitalization, currently equal to $1,500 in cash. Consequently, the Company's
operations are dependent on the net proceeds of the Offering in order to
commence its business operations. Because the Company is only nominally
capitalized, it will not be able to withstand a period of adverse earnings as
well as more established and better capitalized companies. See
"Capitalization."

INTEREST RATE FLUCTUATIONS MAY DECREASE NET INTEREST INCOME

Adjustable-rate Mortgage Assets are typically subject to periodic and
lifetime interest rate caps that limit the amount an adjustable-rate Mortgage
Asset's interest rate can change during any given period, as well as the
minimum rate payable. The Company's borrowings will not be subject to similar
restrictions. Hence, in a period of increasing interest rates, interest rates
on its borrowings could increase without limitation by caps, while the
interest rates on its Mortgage Assets could be so limited. This problem will
be magnified to the extent the Company acquires Mortgage Assets that are not
fully indexed. Further, some adjustable-rate Mortgage Assets may be subject to
periodic payment caps that result in some portion of the interest being
deferred and added to the principal outstanding. This could result in receipt
by the Company of less cash income on its adjustable-rate Mortgage Assets than
is required to pay interest on the related borrowings. These factors could
lower the Company's net interest income or cause a net loss during periods of
rising interest rates, which would negatively impact the Company's financial
condition, cash flows and results of operations.

The Company intends to fund a substantial portion of its acquisitions of
adjustable-rate Mortgage Assets with borrowings that have interest rates based
on indices and repricing terms similar to, but of somewhat shorter maturities
than, the interest rate indices and repricing terms of the Mortgage Assets.
Thus, the Company anticipates that in most cases the interest rate indices and
repricing terms of its Mortgage Assets and its funding sources will not be
identical, thereby creating an interest rate mismatch between assets and
liabilities. While the historical spread between relevant short-term interest
rate indices has been relatively stable, there have been periods, especially
during the 1979-1982 and 1994 interest rate environments, when the spread
between such indices was volatile. During periods of changing interest rates,
such interest rate mismatches could negatively impact the Company's Net
Income, dividend yield and the market price of the Common Stock.

SUBSTANTIAL LEVERAGE AND POTENTIAL NET INTEREST AND OPERATING LOSSES IN
CONNECTION WITH BORROWINGS

The Company intends to employ a leveraging strategy of increasing the size
of its Mortgage Asset portfolio by borrowing against its existing Mortgage
Assets to acquire additional Mortgage Assets. By leveraging its Mortgage
Assets in this manner, the Company expects that 90% of its total Mortgage
Assets typically may be financed with borrowed funds. If the ratio of the
Company's borrowings to total Mortgage Assets exceeds 92%, then, except as
limited by the sources of income tests applicable to the Company as a REIT,
the Company will not acquire net additional Mortgage Assets until the capital
base exceeds 8%. See "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Gross Income Tests." The Company is also permitted
under its Bylaws to have unsecured borrowings of up to 300% of its net assets.
If the returns on the Mortgage Assets purchased with borrowed funds fail to
cover the cost of the borrowings, the Company's results of operations would be
adversely affected.

A majority of the Company's borrowings are expected to be in the form of
collateralized borrowings, primarily reverse repurchase agreements, which will
be "marked to market" based on the market value of the Mortgage Assets pledged
to secure the specific borrowings at a given time. Certain of the Company's
Mortgage Assets may be cross-collateralized to secure multiple borrowing
obligations of the Company to a particular lender. The Company's leveraging
strategy may create instability in the Company's operations. A decline in the
market value of such Mortgage Assets could limit the Company's ability to
borrow or result in lenders initiating margin calls. The Company could be
required to sell Mortgage Assets under adverse market conditions in order to
maintain liquidity. If these sales were made at prices lower than the carrying
value of the Mortgage Assets,

17
<PAGE>

the Company would experience losses. A default by the Company under its
collateralized borrowings could also result in a liquidation of the
collateral, including any cross-collateralized Mortgage Assets, and resulting
loss of the difference between the value of the collateral and the amount
borrowed. To the extent the Company is compelled to liquidate Mortgage Assets
qualifying as Qualified REIT Real Estate Assets to repay borrowings, its
compliance with the REIT rules regarding asset and sources of income
requirements could be negatively affected, ultimately jeopardizing the
Company's status as a REIT. See "Federal Income Tax Consequences--Requirements
for Qualification as a REIT."

FAILURE TO MAINTAIN REIT STATUS WOULD RESULT IN THE COMPANY BEING SUBJECT TO
TAX AS A REGULAR CORPORATION AND SUBSTANTIALLY REDUCE CASH AVAILABLE FOR
DISTRIBUTION TO STOCKHOLDERS

Limitation on Mortgage Assets to Comply with REIT Requirements. In order to
maintain its qualification as a REIT for federal income tax purposes, the
Company must continually satisfy certain tests with respect to the sources of
its income, the nature and diversification of its Mortgage Assets, the amount
of its distributions to stockholders and the ownership of its stock. See
"Federal Income Tax Consequences--Requirements for Qualification as a REIT."
Among other things, these restrictions may limit the Company's ability to
acquire certain types of assets that it otherwise would consider desirable,
limit the ability of the Company to securitize Mortgage Loans for sale to
third parties, and require the Company to make distributions to its
stockholders at times when it may deem it more advantageous to utilize the
funds available for distribution for other corporate purposes (such as the
purchase of additional assets or the repayment of debt) or at times that the
Company may not have funds readily available for distribution. Even if the
Company qualifies for taxation as a REIT, it may be subject to certain federal
taxes based on certain activities, which could result in decreased cash
available for distribution to stockholders. See "Federal Income Tax
Consequences--Taxation of the Company."

Limitations Imposed by REIT Requirements on Hedging and Investments May
Limit Company's Ability to Hedge. The REIT Provisions of the Code may
substantially limit the ability of the Company to hedge its Mortgage Assets
and the related Company borrowings. The Company must limit its income in each
year from "Qualified Hedges" (together with any other income generated from
other than Qualified REIT Real Estate Assets) to less than 25% of the
Company's gross income. In addition, the Company must limit its aggregate
income from hedging and services from all sources (other than from Qualified
REIT Real Estate Assets or Qualified Hedges) to less than 5% of the Company's
gross income each year. As a result, the Company may have to limit its use of
certain hedging techniques that might otherwise have been advantageous. Any
limitation on the Company's use of hedging techniques may result in greater
interest rate risk. If the Company were to receive income in excess of the 25%
or 5% limitation, it could incur payment of a penalty tax equal to the amount
of income in excess of those limitations, or in the case of a willful
violation, loss of REIT status for federal income tax purposes. See "Federal
Income Tax Consequences--Requirements for Qualification as a REIT--Gross
Income Tests."

The Company must also ensure that at the end of each calendar quarter at
least 75% of the value of its assets consists of cash, cash items, government
securities and Qualified REIT Real Estate Assets, and of the investments in
securities not included in the foregoing, the Company does not hold more than
10% of the outstanding voting securities of any one issuer and no more than 5%
by value of the Company's assets consists of the securities of any one issuer.
Failure to comply with any of the foregoing tests would require the Company to
dispose of a portion of its assets within 30 days after the end of the
calendar quarter or face loss of REIT status and adverse tax consequences. See
"Federal Income Tax Consequences--Requirements for Qualification as a REIT--
Asset Tests."

Distribution Requirements to Maintain REIT Status May Require the Company to
Borrow Funds to Make Distributions. The Company's operations may from time to
time generate Taxable Income in excess of its Net Income for financial
reporting purposes (such as from amortization of capitalized purchase
premiums). The Company may also experience circumstances in which its Taxable
Income is in excess of cash flow available for distribution to stockholders.
To the extent that the Company does not otherwise have funds available, either
situation could result in the Company's inability to distribute substantially
all of its Taxable Income as required to maintain

18
<PAGE>

its REIT status. In either situation, the Company could be required to borrow
funds in order to make the required distributions that could increase
borrowing costs and reduce the yield to stockholders, to sell a portion of its
Mortgage Assets at disadvantageous prices in order to raise cash for
distributions, or make a distribution in the form of a return of capital,
which would have the effect of reducing the equity of the Company. See
"Federal Income Tax Consequences--Requirements for Qualification as a REIT--
Distribution Requirement."

Disqualification as a REIT May Result in Substantial Tax Liability. If the
Company should not qualify as a REIT in any tax year, it would be taxed as a
regular domestic corporation and, among other consequences, distributions to
the Company's stockholders would not be deductible by it in computing its
taxable income. Any resulting tax liability could be substantial and would
reduce the amount of cash available for distribution to the Company's
stockholders. In addition, the unremedied failure of the Company to be treated
as a REIT for any one year would disqualify the Company from being treated as
a REIT for four subsequent years. See "Federal Income Tax Consequences--
Termination or Revocation of REIT Status."

LITIGATION

A mortgage company with a similar name recently filed suit against the
Company demanding that the Company not operate under the name "Apex Mortgage
Capital." The Company successfully defended an action for a temporary
restraining order to prohibit the Company from using such name. Although such
decision was not dispositive, the plaintiff company has taken no further
action to date. The Company will continue to evaluate the merits of the
plaintiff's case, but no decision has been made as to how the Company will
respond to further actions, if any. If such litigation is pursued, the Company
may be required to change its name and thereby incur expenses, may be required
to pay damages or may incur substantial litigation costs even if the Company
is successful. As a result of such litigation the Company's results of
operations may be adversely affected.

FAILURE TO SUCCESSFULLY MANAGE INTEREST RATE RISKS MAY ADVERSELY AFFECT
RESULTS OF OPERATIONS

The Company will follow a policy intended to minimize the impact of interest
rate changes. However, developing an objective interest rate risk strategy is
complex and no strategy can completely insulate the Company from risks
associated with interest rate changes. In addition, hedging strategies
typically involve transaction costs that increase dramatically as the period
covered by the hedging transaction increases and that also increase during
periods of rising and fluctuating interest rates. The REIT Provisions of the
Code may substantially limit the Company's ability to engage in these hedging
transactions, and may prevent the Company from effectively implementing
hedging strategies that it determines, absent such restrictions, would best
insulate it from the risks associated with changing interest rates.

In the event that the Company purchases interest rate caps or other interest
rate derivatives to hedge against lifetime and periodic rate or payment caps,
and the provider of interest rate derivatives becomes financially unsound or
insolvent, the Company may be forced to unwind its interest rate derivatives
with such provider and may take a loss on such interest rate derivatives.
Further, the Company could suffer the adverse consequences that the hedging
transaction was intended to protect against.

The adjustable-rate Mortgage Assets that the Company intends to acquire are
generally subject to periodic and lifetime interest rate caps. The Company may
purchase Mortgage Derivative Securities to seek to mitigate the negative
impacts of those interest-rate caps in a rising interest rate environment.
Hedging techniques will be based, in part, on assumed levels of prepayments of
the Company's Mortgage Assets. If prepayments are slower than assumed, the
life of Mortgage Assets will be longer and the effectiveness of the Company's
hedging techniques will be reduced. Hedging techniques involving the use of
Mortgage Derivative Securities are highly complex and may produce volatile
returns. The hedging activity of the Company will also be limited by the asset
and sources of income requirements applicable to the Company as a REIT. See
"Federal Income Tax Consequences--Asset Tests" and "--Gross Income Tests." The
financial futures contracts and options thereon in which the Company may
invest are subject to periodic margin calls that would result in additional
costs to the

19
<PAGE>

Company. Financial futures held at fiscal year end are also required to be
"marked to market" and valued for tax purposes, which could result in taxable
income to the Company with no corresponding cash available for distribution.
There can be no assurance that these hedging techniques will have a beneficial
impact on the Net Income of the Company and the dividend yield of the Common
Stock.

INCREASED LEVELS OF PREPAYMENTS FROM MORTGAGE ASSETS MAY ADVERSELY AFFECT NET
INTEREST INCOME

Prepayments of Mortgage Assets could adversely affect the Company's results
of operations in several ways. The Company anticipates that a substantial
portion of its adjustable-rate Mortgage Assets may bear initial "teaser"
interest rates that are lower than their "fully indexed" rates (the applicable
index plus a margin). In the event that such an adjustable-rate Mortgage Asset
is prepaid prior to or soon after the time of adjustment to a fully indexed
rate, the Company will have held the Mortgage Asset while it was less
profitable and lost the opportunity to receive interest at the fully indexed
rate over the expected life of the adjustable-rate Mortgage Asset. In
addition, the prepayment of any Mortgage Asset that had been purchased at a
premium by the Company would result in the immediate write-off of any
remaining capitalized premium amount and consequent reduction of the Company's
net interest income by such amount. Finally, in the event that the Company is
unable to acquire new Mortgage Assets to replace the prepaid Mortgage Assets,
its financial condition, cash flow and results of operations could be
materially adversely affected.

Prepayment rates generally increase when prevailing interest rates fall
below the interest rates on existing Mortgage Assets. Prepayment experience
also may be affected by the geographic location of the real estate securing
the Mortgage Assets, the assumability of the Mortgage Assets, the ability of
the borrower to obtain or convert to a fixed-rate Mortgage Loan, conditions in
the housing and financial markets, and general economic conditions. The level
of prepayments is also subject to the same seasonal influences as the
residential real estate industry, with prepayments generally being greatest in
the summer months and lower in the winter months.

DEPENDENCE ON THE MANAGER AND ITS PERSONNEL FOR SUCCESSFUL OPERATIONS

The Company will be wholly dependent for the selection, structuring and
monitoring of its Mortgage Assets and associated borrowings on the diligence
and skill of its officers and the officers and employees of the Manager,
primarily Messrs. Barach, Gundlach, Galligan and Osborne. The Company does not
anticipate having employment agreements with its senior officers, or requiring
the Manager to employ specific personnel or dedicate employees solely to the
Company and there are no restrictions on any competing business activities of
such individuals if they are no longer employed by the TCW Group. The Company
is also dependent on other key personnel and on its ability to continue to
attract, retain and motivate qualified personnel. The loss of any key person
could have a material adverse effect on the Company's business, financial
condition, cash flow and results of operations. See "Management of the
Company--Directors and Executive Officers" and "The Manager."

CONFLICTS OF INTEREST BETWEEN THE COMPANY AND THE MANAGER AND ITS AFFILIATES

Affiliates of Manager Will Continue to Invest in Mortgage Securities. The
TCW Group has informed the Company that it has, and expects to continue to
purchase and manage Mortgage Securities in the future for third-party
accounts. The TCW Group will have no obligation to make investment
opportunities available to the Company. As a result, there may be a conflict
of interest between the operations of the Manager and the operations of its
Affiliates in the acquisition and disposition of Mortgage Securities. In
addition, the TCW Group may from time to time purchase Mortgage Securities for
its own account. Such conflicts may result in decisions and/or allocations of
Mortgage Securities by Affiliates of the Manager that are not in the best
interests of the Company.

Affiliates of the Manager Will Invest in Competing Entities. The TCW Group
has informed the Company that it has purchased, and expects to continue to
purchase, equity securities in companies organized for purposes substantially
similar to those of the Company, including competing mortgage REITs, in the
normal course of its investment management business. Any investment by the TCW
Group in competing entities may adversely affect the market price of the
Common Stock.

20
<PAGE>

Manager May Try to Maximize Incentive Compensation and Thereby Increase Risk
to the Company's Mortgage Portfolio. In addition to its base management
compensation, the Manager will have the opportunity to earn incentive
compensation under the Management Agreement for each fiscal quarter in an
amount equal to 30% of the Net Income of the Company (before payment of such
incentive compensation) in excess of the amount that would produce an
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%.
See "The Manager--Manager Compensation." The Company's ability to achieve the
performance level required for the Manager to earn the incentive compensation
is dependent upon the level and volatility of interest rates, the Company's
ability to react to changes in interest rates and to utilize successfully the
operating strategies described herein, and other factors, many of which are
not within the Manager's control. In evaluating Mortgage Assets for investment
and in other management strategies, an undue emphasis on the maximization of
income at the expense of other criteria, such as preservation of capital, in
order to achieve a higher incentive compensation could result in increased
risk to the value of the Company's Mortgage Asset portfolio.

Conflicts Relating to the Manager Rendering Services to Others. The
Management Agreement does not limit or restrict the right of the Manager or
any of its officers, directors, employees or Affiliates from engaging in any
business or rendering services of any kind to any other person, including,
without limitation, the purchase of, or rendering advice to others purchasing
Mortgage Assets that meet the Company's policies and criteria. Notwithstanding
the foregoing, members of the MBS Group of the TCW Group, or any equivalent or
successor group of the TCW Group, during their employment by the TCW Group
will not provide any active management services to a residential mortgage
REIT, other than the Company, that invests primarily in high quality Mortgage
Securities comparable to the Mortgage Securities in which the Company will
invest. In addition, the Management Agreement does not impose a minimum time
commitment that the Manager and its personnel must devote to providing
services to the Company. The Manager may also advise other mortgage-related
entities, including REITs, that invest in residential or commercial mortgages
or other residential and non-residential mortgage securities. The ability of
the Manager and its employees to engage in other business activities could
reduce the time and effort spent by the Manager and its employees on the
management of the Company. See "The Manager--The Management Agreement."

INVESTMENT IN SHORT-TERM INVESTMENTS PENDING ACQUISITION OF MORTGAGE ASSETS
MAY INITIALLY ADVERSELY AFFECT RESULTS OF OPERATIONS

The Company's results of operations initially may be adversely affected
pending purchase of Mortgage Assets and implementation of its Capital and
Leverage Policy, particularly in the several-month period following the
closing of the Offering during which time the Company will be primarily
invested in short-term government securities and other Short-Term Investments.
The Company anticipates that it may take up to 15 months to fully implement
its Capital and Leverage Policy.

FAILURE TO MAINTAIN AN EXEMPTION FROM THE INVESTMENT COMPANY ACT WOULD
ADVERSELY AFFECT RESULTS OF OPERATIONS

The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act.
Accordingly, the Company does not expect to be subject to the restrictive
provisions of the Investment Company Act. The Investment Company Act exempts
entities that are primarily engaged in the business of purchasing or otherwise
acquiring "mortgages and other liens on and interests in real estate"
("Qualifying Interests in Real Estate"). Under the current interpretation of
the staff of the Commission, in order to qualify for this exemption, the
Company must, among other things, maintain at least 55% of its assets directly
in Mortgage Loans, qualifying Pass-Through Certificates and certain other
Qualifying Interests in Real Estate. In addition, unless certain Mortgage
Securities represent all the certificates issued with respect to an underlying
pool of Mortgage Loans, such Mortgage Securities may be treated as securities
separate from the underlying Mortgage Loans and, thus, may not qualify as
Qualifying Interests in Real Estate for purposes of the 55% requirement. The
Company's ownership of certain Mortgage Assets, therefore, may be limited by
the provisions of the Investment Company Act. However, if the Company fails to
qualify for exemption from registration as an investment company, its ability
to use leverage would be substantially reduced, and it would be unable to
conduct its business as described herein. Any such failure to qualify for such
exemption would have a material adverse effect on the Company.

21
<PAGE>

ABSENCE OF PUBLIC MARKET AND NO ASSURANCE THAT A PUBLIC MARKET WILL DEVELOP

Prior to the Offering, there has not been a public market for the Common
Stock, and there can be no assurance that a regular trading market for the
shares of Common Stock offered hereby will develop or, if developed, that any
such market will be sustained. In the absence of a public trading market, an
investor may be unable to liquidate its investment in the Company. The initial
public offering price will be determined by the Company and representatives of
the Underwriters. There can be no assurance that the price at which the shares
of Common Stock will sell in the public market after the closing of the
Offering will not be lower than the price at which they are sold by the
Underwriters. See "Underwriting."

INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE MARKET PRICE OF THE COMMON
STOCK

In the event that a public market for the Common Stock exists, it is likely
that the market price of the shares of the Common Stock will be influenced by
any variation between the net yield on the Company's Mortgage Assets and
prevailing market interest rates. The Company's earnings will be derived
primarily from any positive spread between the yield on its Mortgage Assets
and the cost of its borrowings. Such positive spread will not necessarily be
larger in high interest rate environments than in low interest rate
environments. However, in periods of high interest rates, the Net Income of
the Company and, therefore, the dividend yield on the Common Stock, may be
less attractive compared with alternative investments, which could negatively
impact the price of the Common Stock. If the anticipated or actual net yield
on the Company's Mortgage Assets declines or if prevailing market interest
rates rise, thereby decreasing the positive spread between the net yield on
its Mortgage Assets and the cost of its borrowings, the market price of the
Common Stock may be adversely affected.

VALUE OF MORTGAGE ASSETS MAY BE ADVERSELY AFFECTED BY DEFAULTS ON UNDERLYING
MORTGAGE OBLIGATIONS

The Company will bear the risk of loss on any Mortgage Securities it
purchases in the secondary mortgage market or otherwise. However, such
Mortgage Securities will generally be structured with one or more types of
credit enhancement. Such forms of credit enhancement are intended to provide
protection against risk of loss due to default on the underlying Mortgage
Loan, or bankruptcy, fraud and special hazard losses. To the extent third
parties have been contracted to insure against these types of losses, the
Company would be dependent in part upon the creditworthiness and claims-paying
ability of the insurer and the timeliness of reimbursement in the event of a
default on the underlying obligations. Further, the insurance coverage for
various types of losses is limited in amount, and losses in excess of the
limitation would be borne by the Company.

ACTIVE FORMATION AND OPERATION OF COMPETING MORTGAGE REITS MAY ADVERSELY
AFFECT THE MARKET PRICE OF THE COMMON STOCK

In addition to existing companies, other companies may be organized for
purposes similar to that of the Company, including companies organized as
REITs focused on purchasing High Quality Mortgage Assets. A proliferation of
such companies may increase the competition for equity capital and thereby
adversely affect the market price of the Common Stock. In addition, adverse
publicity affecting this sector of the capital market or significant operating
failures of a competitor may adversely affect the market price of the Common
Stock.

ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME

In general, dividend income that a Tax-Exempt Entity receives from the
Company should not constitute unrelated trade or business income as defined in
Section 512 of the Code ("UBTI"). If, however, excess inclusion income were
realized by the Company and allocated to stockholders, such income cannot be
offset by net operating losses and, if the stockholder is a Tax-Exempt Entity,
is fully taxable as UBTI under Section 512 of the Code and, as to foreign
stockholders, would be subject to federal income tax withholding without
reduction pursuant to any otherwise applicable income tax treaty. See "Federal
Income Tax Consequences--Taxation of Stockholders" and "--Taxation of Tax-
Exempt Entities" for discussions of the treatment of excess inclusion income.
Excess inclusion income would be generated if the Company were to issue debt
obligations with two or

22
<PAGE>

more maturities and the terms of the payments on such obligations bore a
relationship to the payments that the Company received on its Mortgage Assets
securing those debt obligations. The Company intends to arrange its borrowings
in a manner to avoid generating significant amounts of excess inclusion
income. The Company does, however, intend to enter into one or more master
reverse repurchase agreements (i) pursuant to which the Company will issue
various reverse repurchase agreements that will have differing maturity dates,
and (ii) that will afford the counter-party lender the right to sell any of
the Company's Mortgage Securities that have been pledged to the counter-party
if the Company were to default on its obligations to that counter-party
lender. There can be no assurance that the Service might not successfully
maintain that any such borrowing arrangements would give rise to excess
inclusion income that would be allocated among stockholders in some
appropriate fashion. See "Federal Income Tax Consequences--Taxation of
Stockholders." Furthermore, certain types of Tax-Exempt Entities, such as
voluntary employee benefit associations and entities that have borrowed to
acquire their shares of Common Stock, may be required to treat a portion of or
all of the dividends they may receive from the Company as UBTI. See "Federal
Income Tax Consequences--Taxation of Tax-Exempt Entities."

VALUE OF MORTGAGE LOANS MAY BE ADVERSELY AFFECTED BY CHARACTERISTICS OF
UNDERLYING PROPERTY AND BORROWER CREDIT

Mortgage Loan Credit Risks. A portion of the Company's Mortgage Assets
(subject to the 25% policy on Other Mortgage Assets) may consist of Mortgage
Loans. During the time it holds any Mortgage Loans, the Company will be
subject to increased credit risks, including 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 Loan held by the Company, the Company will bear
the risk of loss of principal to the extent of any deficiency between the
value of the secured property, less any payments from an insurer or guarantor,
and the amount owing on the Mortgage Loan. Mortgage Loans in default will also
cease to be eligible collateral for borrowings, and will have to be financed
by the Company out of other funds until ultimately liquidated. Although the
Company intends to establish reserves in amounts it believes are adequate to
cover these risks, in view of the Company's lack of operating history, there
can be no assurance that reserves that are established will be sufficient to
offset losses on Mortgage Loans in the future.

Even assuming that properties secured by any Mortgage Loans held by the
Company provide adequate security for such Mortgage Loans, substantial delays
could be encountered in connection with the foreclosure of defaulted Mortgage
Loans, with corresponding delays in the receipt of related proceeds by the
Company. State and local statutes and rules may delay or prevent the Company's
foreclosure on or sale of the mortgaged property and may prevent it from
receiving proceeds sufficient to repay all amounts due on the related Mortgage
Loan. Some properties that may collateralize the Company's Mortgage Loans may
have unique characteristics or may be subject to seasonal factors that could
materially prolong the time period required to resell the property.

Inability to Securitize Mortgage Loans May Result in Additional Risk
Respecting Borrower Defaults. The Company may acquire and accumulate (subject
to the 25% limitation on Other Mortgage Assets) Mortgage Loans as part of its
investment strategy until a sufficient quantity has been acquired for
securitization into Mortgage Securities. There can be no assurance that the
Company will be successful in securitizing the Mortgage Loans. During the
accumulation period, the Company will be subject to risks of borrower defaults
and bankruptcies, fraud losses and special hazard losses. In the event of any
default under Mortgage Loans held by the Company, the Company will bear the
risk of loss of principal to the extent of any deficiency between the value of
the mortgage collateral and the principal amount of the Mortgage Loan. Also
during the accumulation period, the costs of financing the Mortgage Loans
through reverse repurchase agreements and other borrowings and lines of credit
with warehouse lenders could exceed the interest income on the Mortgage Loans.
It may not be possible or economical for the Company to complete the
securitization of all Mortgage Loans that it acquires, in which case the
Company will continue to hold the Mortgage Loans and bear the risks of
borrower defaults and special hazard losses.

Possible Limitation of Remedies for Sellers' Breach of Representations and
Warranties with Respect to Mortgage Loans. It is expected that when the
Company acquires Mortgage Loans, the seller will represent and

23
<PAGE>

warrant to the Company that there has been no fraud or misrepresentation
during the origination of the Mortgage Loans and will agree to repurchase any
Mortgage Loan with respect to which there is fraud or misrepresentation.
Although the Company expects that it will generally have recourse to the
seller based on the seller's representations and warranties to the Company,
the Company will be at risk for loss to the extent the seller does not perform
its repurchase obligations.

EFFECT OF FUTURE OFFERINGS OF DEBT AND EQUITY ON MARKET PRICE OF THE COMMON
STOCK

The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes of
preferred stock, Common Stock, commercial paper, medium-term notes, CMOs and
senior or subordinated notes. All debt securities, and other borrowings, and
classes of preferred stock will be senior to the Common Stock in a liquidation
of the Company. The effect of additional equity offerings may be the dilution
of the equity of stockholders of the Company or the reduction of the price of
shares of the Common Stock, or both. The Company is unable to estimate the
amount, timing or nature of additional offerings as they will depend upon
market conditions and other factors.

RESTRICTIONS ON OWNERSHIP OF THE COMMON STOCK

Ability to Issue Preferred Stock May Limit Dividend Rights to Holders of the
Common Stock. The authorized capital stock of the Company includes preferred
stock issuable in one or more series. The issuance of preferred stock could
have the effect of making an attempt to gain control of the Company more
difficult by means of a merger, tender offer, proxy contest or otherwise. The
preferred stock, if issued, would have a preference on dividend payments that
could affect the ability of the Company to make dividend distributions to the
common stockholders. See "Description of Capital Stock."

9.8% Ownership Restriction May Limit Market Activity. In order that the
Company may meet the requirements for qualification as a REIT at all times,
the Charter prohibits any person from acquiring or holding, directly or
indirectly, shares of capital stock in excess of 9.8% in value of the
aggregate of the outstanding shares of capital stock or in excess of 9.8% (in
value or in number of shares, whichever is more restrictive) of the aggregate
of the outstanding shares of capital stock of the Company. The Charter further
prohibits (i) any person from beneficially or constructively owning shares of
capital stock that would result in the Company being "closely held" under
Section 856(h) of the Code or otherwise cause the Company to fail to qualify
as a REIT, and (ii) any person from transferring shares of capital stock if
such transfer would result in shares of capital stock being owned by fewer
than 100 persons. If any transfer of shares of capital stock occurs which, if
effective, would result in any transfer or ownership limitations, then that
number of shares of capital stock in excess or in violation of the above
transfer or ownership limitations, the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded
to the nearest whole shares) shall be automatically transferred to a Trustee
of a Trust for the exclusive benefit of one or more Charitable Beneficiaries,
and the intended transferee shall not acquire any rights in such shares.
Subject to certain limitations, the Company's Board of Directors may increase
or decrease the ownership limitations or waive the limitations for individual
investors. See "Description of Capital Stock--Repurchase of Shares and
Restrictions on Transfer."

Requirement That Stockholders Give Notice of 5% Ownership May Limit Market
Activity. Every owner of more than 5% (or such lower percentage as required by
the Code or the regulations promulgated thereunder) of all classes or series
of the Company's capital stock, within 30 days after the end of each taxable
year, is required to give written notice to the Company stating the name and
address of such owner, the number of shares of each class and series of stock
beneficially owned and a description of the manner in which such shares are
held. Each such owner shall provide to the Company such additional information
as the Company may request in order to determine the effect, if any, of such
beneficial ownership on the Company's status as a REIT and to ensure
compliance with the ownership limitations.

The foregoing provisions may inhibit market activity and the resulting
opportunity for the holders of the Common Stock to receive a premium for their
Common Stock that might otherwise exist in the absence of such provisions.
Such provisions also may make the Company an unsuitable investment vehicle for
any person seeking to obtain ownership of more than 9.8% of the outstanding
shares of the Company's Common Stock.

24
<PAGE>

Provisions of Maryland Law Restricting Takeovers May Limit Takeover Attempts
That May Be Beneficial to Stockholders. Certain provisions of the Maryland
General Corporation Law relating to "business combinations" and a "control
share acquisition" and of the Charter and Bylaws of the Company may also have
the effect of delaying, deterring or preventing a takeover attempt or other
change in control of the Company that would be beneficial to stockholders and
might otherwise result in a premium over then prevailing market prices.
Although the Bylaws of the Company contain a provision exempting the
acquisition of Common Stock by any person from the control share acquisition
statute, there can be no assurance that such provision will not be amended or
eliminated at any time in the future. See "Certain Provisions of Maryland Law
and of the Company's Charter and Bylaws."

25
<PAGE>

USE OF PROCEEDS

The net proceeds from the Offering, after deducting underwriting discounts
and commissions and anticipated expenses of the Offering, are estimated to be
$92,713,080 ($106,732,830 if the Underwriters' over-allotment options are
exercised in full). The net proceeds from the Offering will be used by the
Company to purchase its initial portfolio of Mortgage Assets.

The Company may require up to six months to have the net proceeds of the
Offering fully invested in Mortgage Assets and up to an additional nine months
to fully implement the Capital and Leverage Policy to increase the Mortgage
Asset investments to its desired level. Pending full investment in the desired
mix of Mortgage Assets, funds will be committed to Short-Term Investments that
are expected to provide a lower net return than the Company hopes to achieve
from its intended primary Mortgage Asset investments.

DIVIDEND AND DISTRIBUTION POLICY

The Company intends to distribute substantially all of its net Taxable
Income (which does not ordinarily equal net income as calculated in accordance
with GAAP) to stockholders in each year. The Company intends to declare four
regular quarterly dividends. In addition, Taxable Income, if any, not
distributed through regular quarterly dividends will be distributed annually,
at or near year end, in a special dividend. The dividend policy is subject to
revision at the discretion of its Board of Directors. All distributions will
be made by the Company at the discretion of its Board of Directors and will
depend on the earnings and financial condition of the Company, maintenance of
REIT status and such other factors as the Company's Board of Directors deems
relevant. See "Federal Income Tax Consequences--Requirements for Qualification
as a REIT--Distribution Requirement."

In order to qualify as a REIT under the Code, the Company must make
distributions to its stockholders each year in an amount at least equal to (i)
95% of its Taxable Income (before deduction of dividends paid less any net
capital gain), plus (ii) 95% of the excess of the net income from Foreclosure
Property over the tax imposed on such income by the Code, minus (iii) any
excess non-cash income. The "Taxable Income" of the Company for any year means
the taxable income of the Company for such year (excluding any net income
derived either from property held primarily for sale to customers or from
Foreclosure Property) subject to certain adjustments provided in the REIT
Provisions of the Code. See "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Distribution Requirement."

It is anticipated that distributions generally will be taxable as ordinary
income to stockholders of the Company, although a portion of such
distributions may be designated by the Company as capital gain or may
constitute a return of capital. The Company will furnish annually to each of
its stockholders a statement setting forth distributions paid during the
preceding year and their characterization as ordinary income, return of
capital or capital gains. For a discussion of the federal income tax treatment
of distributions by the Company, see "Federal Income Tax Consequences--
Taxation of Stockholders."

26
<PAGE>

CAPITALIZATION

The capitalization of the Company, as of September 15, 1997 and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, is as
follows:

<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED(1)(2)
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Preferred Stock, par value $.01
Authorized--50,000,000 shares--no shares issued and
outstanding....................................... $ -- $ --
Common Stock, par value $.01
Authorized--100,000,000 shares--100 shares issued
and outstanding
(as adjusted, 6,700,100 shares issued)............ 0 67.0
Additional Paid-in Capital......................... 1.5 93,647.6
-------- -------------
Total.............................................. $ 1.5 $ 93,714.6
======== =============
</TABLE>
- --------
(1) Before deducting offering expenses estimated to be $1,000,000, payable by
the Company, and assuming no exercise of the Underwriters' over-allotment
options to purchase up to an additional 1,005,000 shares of Common Stock.

(2) Does not include 1,000,000 shares of Common Stock reserved for issuance
upon exercise of options granted under the Company's 1997 Stock Option
Plan. See "Management of the Company--Stock Options."

LIQUIDITY AND CAPITAL RESOURCES

The Company has been organized to operate so as to qualify as a REIT under
Sections 856 through 860 of the Code and, as such, anticipates distributing
annually at least 95% of its Taxable Income. Cash for such distributions will
be generated from the Company's operations. See "Dividend and Distribution
Policy" and "Federal Income Tax Consequences--Gross Income Tests--Distribution
Requirement."

The principal sources of funds will be the net proceeds of the Offering and
borrowings (primarily reverse repurchase agreements) or the issuance of debt
or additional equity securities. The Company anticipates that it will incur
short-term borrowings immediately after the net proceeds of the Offering have
been invested in the portfolio of Mortgage Assets. The Company's income will
consist primarily of interest and other revenues from its investments in
Mortgage Assets. The Company believes that the net proceeds of the Offering,
combined with the cash flow from operations and the utilization of borrowings,
will be sufficient to enable the Company to meet anticipated liquidity
requirements. If the Company's cash resources are at any time insufficient to
satisfy the Company's liquidity requirements, the Company may be required to
liquidate Mortgage Assets or sell debt or additional equity securities. There
is no assurance that financing will be available to the Company on favorable
terms, or at all. See "Risk Factors--No Current Borrowing Arrangements."

27
<PAGE>

BUSINESS AND STRATEGY

GENERAL

The Company was incorporated in Maryland on September 15, 1997 and, upon the
closing of the Offering, will commence its business of purchasing and holding
a portfolio of adjustable-rate Mortgage Assets. The Company intends to
generate income for distribution to its stockholders primarily from the Net
Income on its Mortgage Assets qualifying as Qualified REIT Real Estate Assets.
The Company's Net Income will result primarily from the difference between (i)
the interest income on its Mortgage Asset investments and (ii) the borrowing
and financing costs of the Mortgage Assets. The Company's principal executive
offices are located at 865 South Figueroa Street, Suite 1800, Los Angeles,
California 90017, and its telephone number is (213) 244-0440.

The Company is currently considering proposals to change its name and may
change its name in the future.

STRATEGY

To achieve its business objective and generate dividend yields that provide
a competitive rate of return for its stockholders, the Company's strategy is
to:

. purchase primarily single-family Mortgage Assets, the majority of which
are currently expected to have adjustable interest rates based on
changes in short-term market interest rates;

. manage the credit risk of its Mortgage Assets through, among other
activities (i) carefully selecting Mortgage Assets to be acquired, (ii)
complying with the Company's policies with respect to credit risk
concentration which, among other things, require the Company to maintain
a Mortgage Asset portfolio with a weighted average rating generally
equivalent to AA (or a comparable rating) or better, (iii) actively
monitoring the ongoing credit quality and servicing of its Mortgage
Assets, and (iv) maintaining appropriate capital levels and allowances
for possible credit losses;

. seek to minimize prepayment risk primarily by structuring a diversified
portfolio with a variety of prepayment characteristics; and

There can be no assurance that the Company will successfully implement its
strategies. See "Risk Factors" for a discussion of factors that could
adversely affect the Company's ability to successfully implement its
strategies.

Although there can be no assurance, the Company believes that it will be
able to generate competitive earnings and dividends while holding Mortgage
Assets of high credit quality and maintaining a disciplined risk- control
profile. The Company will also strive to increase its return to stockholders
over time by: (i) seeking to raise additional capital in order to increase its
ability to invest in additional Mortgage Assets; (ii) striving to lower its
effective borrowing costs through seeking direct funding with collateralized
lenders, in addition to using Wall Street intermediaries, and investigating
the possibility of using collateralized commercial paper and medium-term note
programs; and (iii) improving the efficiency of its balance sheet structure by
investigating the issuance of uncollateralized subordinated debt and other
forms of capital.

28
<PAGE>

Investment Policy. The Company's investment strategy will be to create a
diversified portfolio primarily of High Quality adjustable-rate Mortgage
Securities that, in the aggregate, will preserve the capital base of the
Company and generate income for distribution to its stockholders. The
Company's Mortgage Assets will be held primarily for investment. The Company
intends generally to buy and hold Mortgage Assets to maturity and, therefore,
will seek to have a low portfolio turnover rate. The Company's ability to sell
Mortgage Assets for gain is restricted by the REIT Provisions of the Code and
the rules, regulations and interpretations of the Service thereunder. See
"Federal Income Tax Consequences--Requirements for Qualification as a REIT--
Gross Income Tests."

The Company anticipates that at least 75% of total Mortgage Assets will be
High Quality adjustable-rate Mortgage Securities and Short-Term Investments.
The Mortgage Securities will consist of (i) privately issued mortgage Pass-
Through Certificates as well as Agency Certificates, (ii) certain CMOs and
(iii) Other Mortgage Securities, including certain Mortgage Derivative
Securities. The Company further anticipates that at least 50% of the Company's
total Mortgage Assets will be Agency Certificates or carry a AAA or comparable
rating from at least one of the Rating Agencies. The Company will generally
not acquire Inverse Floaters, REMIC Residuals or First Loss Subordinated
Bonds. The Company may acquire interest only, principal only or other Mortgage
Derivative Securities that receive a disproportionate share of interest income
or principal, either as an independent stand-alone investment opportunity or
to assist in the management of prepayment and other risks, but only on a
limited basis due to the greater risk of loss associated with Mortgage
Derivative Securities. See "Risk Factors--Failure to Successfully Manage
Interest Rate Risks May Adversely Affect Results of Operations."

The remainder of the Company's investment portfolio, composing not more than
25% of its total Mortgage Assets, may consist of unrated or rated Mortgage
Assets that are determined by the Manager to be of comparable quality to High
Quality Mortgage Securities, including (i) adjustable-rate Mortgage Loans
secured by first liens on single-family (one-to-four units) residential
properties, (ii) Pass-Through Certificates or CMOs backed by Mortgage Loans on
single-family properties and (iii) Other Mortgage Securities. The Company
intends to securitize substantially all Mortgage Loans it acquires into High
Quality Mortgage Securities that are Qualified REIT Real Estate Assets that
will then be held for investment. Substantially all of the Company's Mortgage
Assets will constitute Qualified REIT Real Estate Assets.

The Company intends to purchase Mortgage Assets from broker-dealers and
banks that regularly make markets in Mortgage Securities. The Company also
intends to purchase Mortgage Securities from a variety of Suppliers of
Mortgage Assets (typically mortgage bankers, savings and loans, investment
banking firms, home builders and other firms involved in originating and
packaging Mortgage Loans). In acquiring Mortgage Assets, the Company will
compete with other REITs, investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds,
other lenders, Fannie Mae, FHLMC, GNMA and other entities purchasing Mortgage
Assets, some of which have greater financial resources than the Company. There
are several REITs similar to the Company and others may be organized in the
future. The effect of the existence of additional REITs may be to increase
competition for the available supply of Mortgage Assets suitable for purchase
by the Company. There can be no assurance that the Company will be able to
acquire sufficient Mortgage Assets from Suppliers of Mortgage Assets at
spreads above the Company's cost of funds.

The Company's Board of Directors has adopted the investment policies set
forth in this Prospectus as its initial investment policies. The policies may
be changed at any time by the Board of Directors (subject to approval by a
majority of Unaffiliated Directors) without the consent of stockholders. See
"Risk Factors--Control by the Company's Board of Directors of the Company's
Operating Policies and Investment Strategies." The Company's Board of
Directors will establish and approve (including approval by a majority of
Unaffiliated Directors) at least annually the investment policies of the
Company, which will include investment criteria that each Mortgage Asset must
satisfy to be eligible for investment by the Company. The Manager must use
such criteria in determining whether to acquire Mortgage Assets on behalf of
the Company. The Company will not purchase any Mortgage Assets from its
Affiliates other than Mortgage Securities that may be purchased from a taxable
subsidiary of the Company that may be formed in connection with the
securitization of Mortgage Loans.

29
<PAGE>

The Company does not intend to enter into any servicing or administrative
agreements (other than the Management Agreement) with the Manager or any
entities affiliated with the Manager. Any changes in this policy would be
subject to approval by the Company's Board of Directors, including by a
majority of the Unaffiliated Directors. See "Risk Factors--Control by the
Board of Directors of the Company's Operating Policies and Investment
Strategies."

Financing Policy. The Company intends to finance its purchase of Mortgage
Assets initially through equity from the net proceeds of the Offering and,
thereafter, primarily by borrowing against existing Mortgage Assets and using
the net proceeds to acquire additional Mortgage Assets. See "Use of Proceeds"
and "Management Policies and Programs--Capital and Leverage Policy." The
borrowings are expected to be in the form of reverse repurchase agreements (a
borrowing device evidenced by an agreement to sell securities or other
Mortgage Assets to a third-party and a simultaneous agreement to repurchase
them at a specified future date and price, the price difference constituting
interest on the borrowing), loan agreements, Dollar-Roll Agreements (an
agreement to sell a security for delivery on a specified future date and a
simultaneous agreement to repurchase the same or a substantially similar
security on a specified future date), warehouse lines of credit and other
credit facilities. The Company's borrowings generally will be secured by its
Mortgage Assets. The Company's income will be increased through the use of
such borrowings if the cost of the borrowings is less than the interest earned
on the Mortgage Assets purchased with or securing the borrowed funds. However,
during any periods in which this spread is negative, and the Company's
borrowing costs exceed its interest income on Mortgage Assets purchased with
or securing the borrowed funds, the Company could experience losses. See "Risk
Factors--Substantial Leverage and Potential Net Interest and Operating Losses
in Connection with Borrowings" and "--Interest Rate Fluctuations May Decrease
Net Interest Income."

Hedging Policy. The Company intends to enter into hedging transactions to
mitigate the effects of interest rate fluctuations on its portfolio of
Mortgage Assets and related debt. See "Business and Strategy--Asset/Liability
Management Policies--Interest Rate Risk Management Policy." These transactions
may include interest rate swaps, the purchase of interest rate caps and
futures contracts and options on futures contracts and the trading of forward
contracts to mitigate the effects of fluctuations in interest rates. The
Company may also purchase Mortgage Derivative Securities and Excess Servicing
Rights secured by interests in real property as a hedging strategy. The
Company will not acquire any Mortgage Derivative Securities or Excess
Servicing Rights that do not qualify as Qualified REIT Real Estate Assets.
Accordingly, income from Mortgage Derivative Securities and Excess Servicing
Rights acquired by the Company will be qualifying income under the 75% and 95%
sources of income tests applicable to the Company as a REIT. The Company
intends to carefully monitor its income from hedging activity in Mortgage
Assets that are not Qualified REIT Real Estate Assets, and may have to limit
such activity in order to comply with the REIT Provisions of the Code and to
ensure that it does not realize excessive hedging income that could result in
the Company's disqualification as a REIT. See "Federal Income Tax
Consequences--Requirements for Qualification as a REIT--Gross Income Tests."

The Manager. The Manager will manage the day-to-day operations of the
Company, subject to the direction and oversight of the Company's Board of
Directors. The Manager's key officers have experience in raising and managing
mortgage capital, mortgage finance and the purchase and administration of
Mortgage Assets, however, the Manager has not previously managed or operated a
REIT. See "Management of the Company-- Directors and Executive Officers" and
"The Manager" for biographies and a description of the prior business
experience of the executive officers of the Manager, and "Risk Factors--Lack
of Prior Experience" and "--Dependence on the Manager and Its Personnel for
Successful Operations."

COMPETITION FOR MORTGAGE ASSETS

The Company believes that the principal competition in the business of
acquiring and holding Mortgage Assets are financial institutions such as
banks, savings and loans, life insurance companies, institutional investors
such as mutual funds and pension funds, and certain other mortgage REITs. The
Company anticipates that it

30
<PAGE>

will be able to compete effectively and generate competitive rates of return
for stockholders due to the Manager's experience in managing mortgage capital,
access to and experience in secondary mortgage markets, relative freedom to
securitize its Mortgage Assets, relatively low level of operating costs,
ability to utilize prudent amounts of leverage through accessing the wholesale
market for collateralized borrowings, freedom from certain forms of regulation
and the tax advantages of its REIT status.

DESCRIPTION OF MORTGAGE ASSETS

The Company intends to invest principally in the following types of Mortgage
Assets subject to the operating restrictions described in "--Management
Policies and Programs" below.

Pass-Through Certificates

General. The Company's investments in Mortgage Assets are expected to be
concentrated in Pass-Through Certificates. The Pass-Through Certificates to be
acquired by the Company will consist primarily of Pass-Through Certificates
issued by Fannie Mae, FHLMC and GNMA, as well as High Quality privately issued
adjustable-rate mortgage pass-through certificates. The Pass-Through
Certificates to be acquired by the Company will represent interests in
mortgages that will be secured primarily by liens on single-family (one-to-
four units) residential properties. The Company may also acquire, within the
25% investment limitation on Other Mortgage Assets, unrated or rated Pass-
Through Certificates that represent interests in mortgages secured by liens on
single-family properties that are determined by the Manager and the Board of
Directors to be of comparable quality to High Quality Mortgage Securities.

Pass-Through Certificates backed by adjustable-rate Mortgage Loans are
subject to lifetime interest rate caps and to periodic interest rate caps that
limit the amount an interest rate can change during any given period. The
Company's borrowings are generally not subject to similar restrictions. In a
period of increasing interest rates, the Company could experience a decrease
in Net Income or incur losses because the interest rates on its borrowings
could exceed the interest rates on ARM Pass-Through Certificates owned by the
Company. The impact on Net Income of such interest rate changes will depend on
the adjustments features of the Mortgage Assets owned by the Company, the
maturity schedules of the Company's borrowings and related hedging.

Privately Issued ARM Pass-Through Certificates. Privately issued ARM Pass-
Through Certificates are structured similarly to the Fannie Mae, FHLMC and
GNMA pass-through certificates discussed below and are issued by originators
of and investors in Mortgage Loans, including savings and loan associations,
savings banks, commercial banks, mortgage banks and special purpose
subsidiaries of such institutions. Privately issued ARM Pass-Through
Certificates are usually backed by a pool of conventional adjustable-rate
Mortgage Loans and are generally structured with credit enhancement such as
pool insurance or subordination. However, privately issued ARM Pass-Through
Certificates are typically not guaranteed by an entity having the credit
status of Fannie Mae, FHLMC or GNMA guaranteed obligations.

Existing Fannie Mae ARM Programs. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (12 U.S.C. (S) 1716 et seq.). Fannie Mae
provides funds to the mortgage market primarily by purchasing Mortgage Loans
on homes from local lenders, thereby replenishing their funds for additional
lending. Fannie Mae established its first ARM programs in 1982 and currently
has several ARM programs under which ARM certificates may be issued, including
programs for the issuance of securities through REMICs under the Code.

Each Fannie Mae ARM Pass-Through Certificate issued to date has been issued
in the form of a Pass-Through Certificate representing a fractional undivided
interest in a pool of ARMs formed by Fannie Mae. The ARMs included in each
pool are fully amortizing conventional Mortgage Loans secured by a first lien
on either one-to-four family residential properties or multifamily properties.
The original terms to maturities of the Mortgage Loans generally do not exceed
40 years. Currently, Fannie Mae has issued several different series of ARMs.
All of Fannie Mae's series of ARMs are in its lender (or "swap"), mortgage-
backed securities program where individual lenders swap pools of Mortgage Loans
that they originated or purchased for a Fannie Mae

31
<PAGE>

security backed by those same Mortgage Loans. Each series bears an initial
interest rate and a margin tied to an index based on all Mortgage Loans in the
related pool, less a fixed percentage representing servicing compensation and
Fannie Mae's guarantee fee. The specified index used in each series has
included the One-Year U.S. Treasury Rate published by the Federal Reserve
Board, the 11th District Cost of Funds Index published by the Federal Home
Loan Bank of San Francisco and other indices. In addition, the majority of
series of Fannie Mae ARMs issued to date have had a monthly, semi-annual or
annual interest rate adjustment.

Adjustments to the interest rates on Fannie Mae ARMs are typically subject
to lifetime caps. In addition, some pools contain ARMs that are subject to
semi-annual or annual interest rate change limitations, frequently 1% to 2%,
respectively. Some pools contain ARMs that provide for limitations on the
amount by which monthly payments may be increased, but have no limitation on
the frequency or magnitude of changes to the mortgage interest rate of the ARM
except for the lifetime cap. In cases where an increase in the rate cannot be
covered by the amount of the scheduled payment, the uncollected portion of
interest is deferred and added to the principal amount of the ARM. In such
cases, interest paid on the Fannie Mae Certificates is a monthly pass-through
of the amount of interest on each ARM rather than a weighted average pass-
through rate of interest.

Fannie Mae guarantees to the registered holder of a Fannie Mae Certificate
that it will distribute amounts representing scheduled principal and interest
(at the rate provided by the Fannie Mae Certificate) on the Mortgage Loans in
the pool underlying the Fannie Mae Certificate, whether or not received, and
the full principal amount of any such Mortgage Loan foreclosed or otherwise
finally liquidated, whether or not the principal amount is actually received.
The obligations of Fannie Mae under its guarantees are solely those of Fannie
Mae and are not backed by the full faith and credit of the United States. If
Fannie Mae were unable to satisfy such obligations, distributions to holders
of Fannie Mae Certificates would consist solely of payments and other
recoveries on the underlying Mortgage Loans and, accordingly, monthly
distributions to holders of Fannie Mae Certificates would be affected by
delinquent payments and defaults on such Mortgage Loans.

Existing FHLMC ARM Programs. The Federal Home Loan Mortgage Corporation is a
corporate instrumentality of the United States created pursuant to an Act of
Congress (Title III of the Emergency Home Finance Act of 1970, as amended, 12
U.S.C. (S) 1451-1459), on July 24, 1970. The principal activity of FHLMC
currently consists of the purchase of Conforming Mortgage Loans or
participation interests therein and the resale of the loans and participations
so purchased in the form of guaranteed Mortgage Securities. FHLMC established
its first regular ARM program in 1986 and currently has several regular ARM
programs available for the issuance of ARM certificates and a number of
special programs that may be offered to Mortgage Loan sellers. All of the
Mortgage Loans evidenced by FHLMC Certificates are conventional Mortgage
Loans, and therefore are not guaranteed or insured by, and are not obligations
of, the United States or any agency or instrumentality thereof, other than
FHLMC.

Each FHLMC Certificate issued to date has been issued in the form of a Pass-
Through Certificate representing an undivided interest in a pool of ARMs
purchased by FHLMC. The ARMs included in each pool are fully amortizing,
conventional Mortgage Loans with original terms to maturity of up to 40 years
secured by first liens on one-to-four unit family residential properties or
multi-family properties. An ARM certificate issued by FHLMC may be issued
under one of two Cash Programs (comprised of Mortgage Loans purchased from a
number of sellers) or Guarantor Programs (comprised of Mortgage Loans
purchased from one seller in exchange for participation certificates
representing interests in the Mortgage Loans purchased.) The interest rate
paid on FHLMC Certificates adjusts annually on the first day of the month
following the month in which the interest rates on the underlying Mortgage
Loans adjust. The interest rates paid on ARM certificates issued under FHLMC's
standard ARM programs adjust annually in relation to the One-Year U.S.
Treasury Rate published by the Federal Reserve Board. The specified index used
in each FHLMC series has also included the 11th District Cost of Funds Index
published by the Federal Home Loan Bank of San Francisco and other indices.
Interest rates paid on FHLMC Certificates equal the applicable index rate plus
a specified number of basis points ranging typically from 125 to 250 basis
points. In addition, the majority of series of FHLMC Mortgage Securities
issued to date have had a monthly, semi-annual or annual interest adjustment.
Adjustments in the interest rates paid are generally limited to an annual
increase or decrease of either 1% or 2% and to a lifetime cap of 5% or 6% over

32
<PAGE>

the initial interest rate. Certain FHLMC programs include Mortgage Loans that
allow the borrower to convert the adjustable mortgage interest rate of his ARM
to a fixed rate. ARMs that are converted into fixed-rate Mortgage Loans are
repurchased by FHLMC or by the seller of such Mortgage Loans to FHLMC, at the
unpaid principal balance thereof, plus accrued interest to the due date of the
last adjustable rate interest payment.

Some FHLMC pools contain ARMs that provide for limitations on the amount by
which monthly payments may be increased but have no limitation on the
frequency or magnitude of changes to the mortgage interest rate of the ARM
except for the lifetime cap. In cases where an increase in the rate cannot be
covered by the amount of the scheduled payment, the uncollected portion of
interest is deferred and added to the principal amount of the ARM. In such
cases, interest paid on the FHLMC Certificates is a monthly pass-through of
the amount of interest on each ARM rather than a weighted average pass-through
rate of interest.

FHLMC guarantees to each holder of its ARM certificates the timely payment
of interest at the applicable pass-through rate and ultimate collection of all
principal on the holder's pro rata share of the unpaid principal balance of
the related ARMs, but does not guarantee the timely payment of scheduled
principal of the underlying Mortgage Loans. The obligations of FHLMC under its
guarantees are solely those of FHLMC and are not backed by the full faith and
credit of the United States. If FHLMC were unable to satisfy such obligations,
distributions to holders of FHLMC Certificates would consist solely of
payments and other recoveries on the underlying Mortgage Loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such Mortgage Loans.

Existing GNMA ARM Programs. GNMA is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development
("HUD"). Section 306(g) of Title III of the National Housing Act of 1934, as
amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment
of the principal of and interest on certificates that represent an interest in
a pool of Mortgage Loans insured by the FHA under the Housing Act or Title V
of the Housing Act of 1949, or partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38,
United States Code and other loans eligible for inclusion in mortgage pools
underlying GNMA Certificates. Section 306(g) of the Housing Act provides that
"the full faith and credit of the United States is pledged to the payment of
all amounts which may be required to be paid under any guaranty under this
subsection." An opinion, dated December 12, 1969, of an Assistant Attorney
General of the United States, states that such guarantees under Section 306(g)
of mortgage-backed certificates of the type that may be purchased by the
Company or pledged as security for a series of Mortgage Securities are
authorized to be made by GNMA and "would constitute general obligations of the
United States backed by its full faith and credit."

The interest rate paid on the certificates issued under GNMA's standard ARM
program adjusts annually in relation to the One-Year U.S. Treasury Rate
published by the Federal Reserve Board. Interest rates paid on GNMA
Certificates typically equal the index rate plus 150 basis points. Adjustments
in the interest rate are generally limited to an annual increase or decrease
of 1% and to a lifetime cap of 5%.

CMOs

The Company may, from time to time, invest in variable-rate and short-term
fixed-rate CMOs. CMOs ordinarily are issued in series, each of which consists
of several serially maturing classes ratably secured by a single pool of
Mortgage Loans or Pass-Through Certificates. Generally, principal payments
received on the mortgage-related assets securing a series of CMOs, including
prepayments on such mortgage-related assets, are applied to principal payments
on one or more classes of the CMOs of such series on each principal payment
date for such CMOs. Scheduled payments of principal of and interest on the
mortgage-related assets and other collateral securing a series of CMOs are
intended to be sufficient to make timely payments of interest on such CMOs and
to retire each class of such CMOs by its stated maturity.

CMOs may be subject to certain rights of issuers thereof to redeem such CMOs
prior to their stated maturity dates, which may have the effect of diminishing
the Company's anticipated return on its investment. The Company will not
acquire any CMOs that do not qualify as Qualified REIT Real Estate Assets.

33
<PAGE>

Mortgage Warehouse Participations

The Company also may from time to time acquire Mortgage Warehouse
Participations as an additional means of diversifying its sources of income.
The Company anticipates that such investments, together with its investments
in Other Mortgage Assets, will not in the aggregate exceed 25% of its total
Mortgage Assets. These investments are participations in lines of credit to
Mortgage Loan originators that are secured by recently originated Mortgage
Loans that are in the process of being sold to investors. Mortgage Warehouse
Participations do not qualify as Qualified REIT Real Estate Assets.
Accordingly, this activity will be limited by the REIT Provisions of the Code.
See "Federal Income Tax Consequences--Requirements for Qualification as a
REIT."

Other Mortgage Securities

General. The Company may acquire Other Mortgage Securities or interests
therein if it determines that it will be beneficial to do so and it will not
adversely affect qualification of the Company as a REIT. Such Other Mortgage
Securities may include non-High Quality Mortgage Assets and other Mortgage
Securities collateralized by single-family Mortgage Loans, Mortgage Warehouse
Participations, Mortgage Derivative Securities, Subordinated Interests and
other mortgage-backed and mortgage-collateralized obligations, other than
Pass-Through Certificates and CMOs.

Mortgage Derivative Securities. The Company may acquire Mortgage Derivative
Securities on a limited basis as market conditions warrant, either as an
independent stand-alone investment opportunity or to assist in the management
of prepayment and other risks. Mortgage Derivative Securities provide for the
holder to receive interest only, principal only, or interest and principal in
amounts that are disproportionate to those payable on the underlying Mortgage
Loans. Payments on Mortgage Derivative Securities are highly sensitive to the
rate of prepayments on the underlying Mortgage Loans. In the event of more
rapid than anticipated prepayments on such Mortgage Loans, the rates of return
on interests in Mortgage Derivative Securities representing the right to
receive interest only or a disproportionately large amount of interest
("Interest Only Derivatives") would be likely to decline. Conversely, the
rates of return on Mortgage Derivative Securities representing the right to
receive principal only or a disproportionate amount of principal ("Principal
Only Derivatives") would be likely to increase in the event of rapid
prepayments.

The Company presently intends to acquire Mortgage Derivative Securities,
including Principal and Interest Only Derivatives. Interest Only Derivatives
may be an effective hedging device since they generally increase in value as
Mortgage Securities representing interests in adjustable-rate mortgages
decrease in value. The Company also may invest in other types of floating-rate
derivatives that are currently available in the market. The Company also may
invest in other Mortgage Derivative Securities that may in the future be
developed if the Board of Directors, including a majority of Unaffiliated
Directors, determines that such investments would be advantageous to the
Company.

The Company will generally not acquire Inverse Floaters, First Loss
Subordinated Bonds, REMIC Residuals or other CMO Residuals. However, the
Company may retain residual interests in its own securitizations of Mortgage
Loans. Moreover, the Company will not purchase any Mortgage Derivative
Securities that do not qualify as Qualified REIT Real Estate Assets.

Subordinated Interests. The Company also may acquire Subordinated Interests,
which are classes of Mortgage Securities that are junior to other classes of
such series of Mortgage Securities in the right to receive payments from the
underlying Mortgage Loans. The subordination may be for all payment failures
on the Mortgage Loans securing or underlying such series of Mortgage
Securities. The subordination will not be limited to those resulting from
certain types of risks, such as those resulting from war, earthquake or flood,
or the bankruptcy of a borrower. The subordination may be for the entire
amount of the series of Mortgage Securities or may be limited in amount.

Any Subordinated Interests acquired by the Company will be limited in amount
and bear yields that the Company believes are commensurate with the risks
involved. The market for Subordinated Interests is not

34
<PAGE>

extensive and may be illiquid. In addition, the Company's ability to sell
Subordinated Interests will be limited by the REIT Provisions of the Code.
Accordingly, the Company intends to purchase Subordinated Interests for
investment purposes only. Although publicly offered Subordinated Interests
generally will be rated, the risks of ownership will be substantially the same
as the ownership of unrated Subordinated Interests because the rating does not
address the possibility that the Company might suffer a lower than anticipated
yield or fail to recover its initial investment. The Company will only
purchase Subordinated Interests that are consistent with its credit risk
management policy and will not purchase any Subordinated Interests that do not
qualify as Qualified REIT Real Estate Assets.

Mortgage Loans

General. The Company intends to acquire and accumulate Mortgage Loans as
part of its investment strategy until a sufficient quantity has been
accumulated for securitization into High Quality Mortgage Securities. The
Company anticipates that the Mortgage Loans acquired by it and not yet
securitized, together with its investments in Other Mortgage Assets, will not
constitute more than 25% of the Company's total Mortgage Assets at any time.
All Mortgage Loans will be acquired with the intention of securitizing them
into High Quality Mortgage Securities. However, there can be no assurance that
the Company will be successful in securitizing the Mortgage Loans. After a
pool of Mortgage Loans has been securitized, the Mortgage Loans will no longer
be considered Other Mortgage Assets. To meet the Company's investment
criteria, the Mortgage Loans to be acquired by the Company will generally
conform to the underwriting guidelines established by Fannie Mae, FHLMC or
other credit insurers. Applicable banking laws generally require that an
appraisal be obtained in connection with the original issuance of Mortgage
Loans by the lending institution. The Company does not intend to obtain
additional appraisals at the time of acquiring Mortgage Loans.

The Mortgage Loans may be originated by or purchased from various Suppliers
of Mortgage Assets throughout the United States, such as savings and loan
associations, banks, mortgage bankers, home builders, insurance companies and
other mortgage lenders. The Company may acquire Mortgage Loans directly from
originators and from entities holding Mortgage Loans originated by others. The
Board of Directors of the Company has not established any limits upon the
geographic concentration of Mortgage Loans to be acquired by the Company or
the credit quality of Suppliers of Mortgage Assets. See "Risk Factors--
Interest Rate Fluctuations May Decrease Net Interest Income" and "--No Current
Mortgage Assets."

The Company anticipates that it will acquire primarily ARMs. The interest
rate on ARMs is typically tied to an index (such as the One-Year U.S. Treasury
Rate published by the Federal Reserve Board, the 11th District Cost of Funds
Index published by the Federal Home Loan Bank of San Francisco or LIBOR) and
is adjustable periodically at various intervals. Such Mortgage Loans may be
subject to lifetime or periodic interest rate or payment caps.

Conforming and Nonconforming Mortgage Loans. The Company may acquire both
Conforming and Nonconforming Mortgage Loans for securitization. Conforming
Mortgage Loans comply with the requirements for inclusion in a loan guarantee
program sponsored by Fannie Mae, FHLMC or GNMA. Under current regulations, the
maximum principal balance allowed on Conforming Mortgage Loans ranges from
$214,600 for one-unit residential loans ($321,000 for such residential loans
secured by mortgage properties located in either Alaska or Hawaii) to $412,450
for four-unit residential loans ($618,875 for such residential loans secured
by mortgaged properties located in either Alaska or Hawaii). Nonconforming
Mortgage Loans are Mortgage Loans that do not qualify in one or more respects
for purchase by Fannie Mae or FHLMC under their standard programs. The Company
expects that a majority of Nonconforming Mortgage Loans it purchases will be
nonconforming primarily because they have original principal balances which
exceed the requirements for FHLMC or Fannie Mae programs.

Commitments to Mortgage Loan Sellers. The Company may issue commitments
("Commitments") to originators and other sellers of Mortgage Loans who follow
policies and procedures that generally comply with Fannie Mae and FHLMC
regulations and guidelines and that comply with all applicable federal and
state laws

35
<PAGE>

and regulations for Mortgage Loans secured by single-family (one-to-four
units) residential properties. In addition, Commitments may be issued for
Agency Certificates as well as privately issued Pass-Through Certificates and
Mortgage Loans. Commitments will obligate the Company to purchase Mortgage
Assets from the holders of the Commitments for a specific period of time, in a
specific aggregate principal amount and at a specified price and margin over
an index. Although the Company may commit to acquire Mortgage Loans prior to
funding, all Mortgage Loans are to be fully funded prior to their acquisition
by the Company. Following the issuance of Commitments, the Company will be
exposed to risks of interest rate fluctuations similar to those risks on its
adjustable-rate Mortgage Assets.

Securitization of Mortgage Loans. The Mortgage Loans will be acquired by the
Company and held until a sufficient quantity has been accumulated for
securitization. During the accumulation period, the Company will be subject to
risks of borrower defaults and bankruptcies, fraud losses and special hazard
losses (such as those occurring from earthquakes or floods) that are not
covered by standard hazard insurance. In the event of a default on any
Mortgage Loan held by the Company, the Company will bear the risk of loss of
principal to the extent of any deficiency between the value of the collateral
underlying the Mortgage Loan and the principal amount of the Mortgage Loan. No
assurance can be given that any such mortgage, fraud or hazard insurance will
adequately cover a loss suffered by the Company. Also during the accumulation
period, the costs of financing the Mortgage Loans through reverse repurchase
agreements and other borrowings and lines of credit with warehouse lenders
could exceed the interest income on the Mortgage Loans. It may not be possible
or economical for the Company to complete the securitization for all Mortgage
Loans that the Company acquires, in which case the Company will continue to
bear the risks of borrower defaults and special hazard losses.

Protection Against Mortgage Loan Risks. It is anticipated that each Mortgage
Loan purchased will have a commitment for mortgage pool insurance from a
mortgage insurance company with a claims-paying ability in one of the two
highest rating categories by either of the Rating Agencies. Mortgage pool
insurance insures the payment of certain portions of the principal and
interest on Mortgage Loans. In lieu of mortgage pool insurance, the Company
may arrange for other forms of credit enhancement such as letters of credit,
subordination of cash flows, corporate guaranties, establishment of reserve
accounts or over-collateralization. The Company expects that all Mortgage
Loans to be acquired will be reviewed by a mortgage pool insurer or other
qualified Mortgage Loan underwriter to ensure that the credit quality of the
Mortgage Loans meets the insurer's guidelines. The Company intends to rely
primarily upon the credit evaluation of such third-party mortgage pool insurer
or underwriter issuing the commitment rather than make its own independent
credit review in determining whether to purchase a Mortgage Loan. Credit
losses covered by the pool insurance policies or other forms of credit
enhancement are restricted to the limits of their contractual obligations and
may be lower than the principal amount of the Mortgage Loan. The pool
insurance or credit enhancement will be issued when the Mortgage Loan is
subsequently securitized, and the Company will be at risk for credit losses on
that Mortgage Loan prior to its securitization.

In addition to credit enhancement, the Company anticipates that it will also
obtain a commitment for special hazard insurance on the Mortgage Loans, if
available at a reasonable cost, to mitigate casualty losses that are not
usually covered by standard hazard insurance, such as vandalism, war,
earthquake and floods. This special hazard insurance is not in force during
the accumulation period, but is activated instead at the time the Mortgage
Loans are pledged as collateral for the Mortgage Securities.

It is expected that when the Company acquires Mortgage Loans, the seller
will generally represent and warrant to the Company that there has been no
fraud or misrepresentation during the origination of the Mortgage Loans and
generally agree to repurchase any Mortgage Loan with respect to which there is
fraud or misrepresentation. The Company will provide similar representations
and warranties when the Company sells or pledges the Mortgage Loans as
collateral for Mortgage Securities. If a Mortgage Loan becomes delinquent and
the pool insurer is able to prove that there was a fraud or misrepresentation
in connection with the origination of the Mortgage Loan, the pool insurer will
not be liable for the portion of the loss attributable to such fraud or
misrepresentation. Although the Company will generally have recourse to the
seller based on the seller's

36
<PAGE>

representations and warranties to the Company, the Company will generally be
at risk for loss to the extent the seller does not perform its repurchase
obligations.

MANAGEMENT POLICIES AND PROGRAMS

Asset Acquisition Policy

The Company will only acquire those Mortgage Assets that are consistent with
the Company's balance sheet guidelines and risk management objectives. Since
the intention of the Company is generally to hold its Mortgage Assets until
maturity, the Company will generally not seek to acquire Mortgage Assets with
investment returns that are attractive only in a limited range of scenarios.
The Company believes that future interest rates and mortgage prepayment rates
are very difficult to predict. Therefore, the Company will seek to acquire
Mortgage Assets that it believes will provide competitive returns over a broad
range of interest rate and prepayment scenarios.

The Company will acquire Mortgage Assets that it believes will maximize
returns on capital invested, after considering (i) the amount and nature of
the anticipated cash flow from the Mortgage Assets, (ii) the Company's ability
to pledge Mortgage Assets to secure collateralized borrowings, (iii) the
increase in the Company's capital requirement determined by the Company's
Capital and Leverage Policy resulting from the purchase and financing of
Mortgage Assets, (iv) the costs of financing, hedging, managing, securitizing
and reserving for Mortgage Assets, and (v) the Company's credit risk
management policy. Prior to acquisition of a Mortgage Asset, potential returns
on capital employed are assessed over the life of the Mortgage Asset and in a
variety of interest rate, yield spread, financing cost, credit loss and
prepayment scenarios.

The Company will also give consideration to balance sheet management and
risk diversification issues. A specific Mortgage Asset that is being evaluated
for potential acquisition is deemed more or less valuable to the Company to
the extent it serves to increase or decrease certain interest rate or
prepayment risks that may exist in the balance sheet, to diversify or
concentrate credit risk, and to meet the cash flow and liquidity objectives
the Company may establish for the balance sheet from time to time. The Company
will evaluate the addition of a potential Mortgage Asset and its associated
borrowings and hedges to the balance sheet and the impact that the potential
Mortgage Asset would have on the risk in, and returns generated by, the
Company's balance sheet as a whole over a variety of scenarios.

The Company will focus primarily on the acquisition of adjustable-rate
Mortgage Assets, and believes that currently such products are more attractive
for the Company's purposes than are fixed-rate Mortgage Assets. Although the
cost of hedging a fixed-rate Mortgage Asset to meet the Company's
asset/liability management goals is usually significant, the Company may
purchase fixed-rate Mortgage Assets (generally in combination with hedging
instruments) in the future should the potential returns on capital invested,
after hedging and all other costs, exceed the returns available from other
Mortgage Assets or if the purchase of such Mortgage Assets would serve to
reduce or diversify the risks of the Company's balance sheet.

The Company may also purchase the stock of other mortgage REITs or similar
companies when it believes that such purchase will yield relatively attractive
returns on capital employed. When the stock market valuations of such
companies are low in relation to the market value of their assets, such stock
purchases can be a way for the Company to acquire an interest in a pool of
Mortgage Assets at an attractive price. The Company does not, however,
presently intend to invest in the securities of other issuers for the purpose
of exercising control or to underwrite securities of other issuers.

The Company intends to acquire new Mortgage Assets, and will also seek to
expand its capital base in order to further increase the Company's ability to
acquire new Mortgage Assets, when the potential returns from new Mortgage
Assets appear attractive relative to the return expectations of stockholders
(as expressed principally by the effective dividend yield of the Common
Stock). The Company may in the future acquire Mortgage Assets by offering its
debt or equity securities in order to acquire such Mortgage Assets.

37
<PAGE>

The Company generally intends to hold Mortgage Assets to maturity. In
addition, the REIT Provisions of the Code limit in certain respects the
ability of the Company to sell Mortgage Assets. See "Federal Income Tax
Consequences--Taxation of the Company." The Company may decide to sell
Mortgage Assets from time to time, however, for a number of reasons including,
without limitation, to dispose of a Mortgage Asset as to which credit risk
concerns have arisen, to reduce interest rate risk, to substitute one type of
Mortgage Asset for another to improve yield or to maintain compliance with the
55% requirement under the Investment Company Act, and generally to restructure
the balance sheet when the Company deems such action advisable. The Company
will select any Mortgage Assets to be sold according to the particular purpose
such sale will serve. The Company's Board of Directors has not adopted a
policy that would restrict the Company's authority to determine the timing of
sales or the selection of Mortgage Assets to be sold.

As a requirement for maintaining REIT status, the Company must distribute to
stockholders annually aggregate dividends equaling at least 95% of its Taxable
income. See "Federal Income Tax Consequences--Distribution Requirement." The
Company will make additional distributions of capital when the return
expectations of the stockholders (as expressed principally by the effective
dividend yield of its Common Stock) appear to exceed returns potentially
available to the Company through making new investments in Mortgage Assets.
Subject to the limitations of applicable securities and state laws, the
Company can distribute capital by making purchases of its own Common Stock,
through paying down or repurchasing any outstanding uncollateralized debt
obligations, or through increasing the Company's dividend to include a return
of capital.

Capital and Leverage Policy

General. The Company's goal is to strike a balance between the under-
utilization of leverage, which reduces potential returns to stockholders, and
the over-utilization of leverage, which could reduce the Company's ability to
meet its obligations during adverse market conditions. As described below, the
Company has established a Capital and Leverage Policy that limits its ability
to acquire additional Mortgage Assets during times when the actual capital
base of the Company is less than a required amount defined in such Policy,
currently an 8% equity ratio. In this way, the use of balance sheet leverage
is better controlled. The actual capital base for the purpose of the Capital
and Leverage Policy is equal to the market value of total Mortgage Assets less
the book value of total collateralized borrowings. The actual capital base, as
so defined, represents the approximate liquidation value of the Company and
approximates the market value of Mortgage Assets less the book value of total
collateralized borrowings. The actual capital base, as so defined, represents
the approximate liquidation value of the Company and approximates the market
value of Mortgage Assets that can be pledged or sold to meet over-
collateralization requirements for the Company's borrowings. The unpledged
portion of the Company's actual capital base is available to be pledged or
sold as necessary to maintain over-collateralization levels for the Company's
borrowings.

Acquisition of Mortgage Assets. The Company is prohibited from acquiring net
additional Mortgage Assets during periods when the actual capital base of the
Company is less than the minimum amount required under the Capital and
Leverage Policy (except when such asset acquisitions may be necessary to
maintain REIT status or the Company's exemption from the Investment Company
Act). In addition, if the actual capital base falls below the requirement of
the Capital and Leverage Policy, the Manager is required to submit to the
Company's Board of Directors a plan designed to bring the Company back to its
target capital-to-assets ratio. It is anticipated that in many circumstances
this goal will be achieved over time without active management through the
natural process of mortgage principal repayments and increases in the market
values of Mortgage Assets as their coupon rates adjust upwards to market
levels. The Company anticipates that the actual capital base is likely to
temporarily exceed the capital requirement during periods following new equity
offerings, including the Offering, and during periods of falling interest
rates and that the actual capital base is likely to fall below the Capital and
Leverage Policy requirements during periods of rising interest rates.

The first component of the Company's Capital and Leverage Policy
requirements is the current aggregate overcollateralization amount, or
"haircut," lenders will require the Company to hold as capital. The haircut
for each Mortgage Asset is determined by the lender based on the risk
characteristics and liquidity of the particular

38
<PAGE>

Mortgage Asset. Haircut levels on individual borrowings generally range from
3% for Agency Certificates to 20% for certain Privately Issued Certificates,
and are likely to average between 3% and 10% for the Company as a whole.
Should the market value of the pledged Mortgage Assets decline, the Company
will be required to deliver additional collateral to the lenders in order to
maintain a constant over-collateralization level on its borrowings.

The second component of the Company's Capital and Leverage Policy
requirements is the "liquidity capital cushion." The liquidity capital cushion
is an additional amount of capital in excess of the haircut maintained by the
Company in order to help it meet the demands of the lenders for additional
collateral should the market value of its Mortgage Assets decline. The
liquidity capital cushions assigned to the Company's portfolio of Mortgage
Assets are based on the Company's assessment of each Mortgage Asset's market
price volatility, credit risk, liquidity and attractiveness for use as
collateral by lenders. This process relies on the Company's ability to
identify and weigh the relative importance of these and other factors.
Consideration is also given to hedges associated with the Mortgage Assets and
any effect such hedges may have on reducing net market price volatility,
concentration or diversification of credit and other risks in the balance
sheet as a whole and the net cash flows that can be expected to arise from the
interaction of the various components of the Company's balance sheet. The
Company anticipates that at least 50% of the Mortgage Assets shall be invested
in Agency Certificates, AAA (or comparably) rated adjustable-rate Mortgage
Securities or Mortgage Assets with similar liquidity characteristics. The
Company's Board of Directors will review on a periodic basis various analyses
by the Manager of the risks inherent in the Company's balance sheet, including
an analysis of the effects of various scenarios on the Company's net cash
flows, earnings, dividends, liquidity and net market value. Should the
Company's Board of Directors determine that the minimum required capital base
set by the Capital and Leverage Policy is either too low or too high, the
Board of Directors will raise or lower the capital requirement accordingly.

Under current market conditions, the Company will seek to maintain its
aggregate minimum capital base at approximately 10% of the market value of its
Mortgage Assets. This percentage will fluctuate over time as the composition
of the balance sheet changes, haircut levels required by lenders change, the
market value of the Mortgage Assets change and as liquidity capital cushion
percentages set by the Company's Board of Directors are adjusted over time.
However, the Company's aggregate minimum capital requirement will not fall
below 8% of its Mortgage Assets, taking into account callable debt such as
repurchase agreements subject to margin calls. The Company's policy for
aggregate minimum capital requirements will be reviewed by its Board of
Directors upon issuance of any non-callable debt and as market conditions
change.

The Company's Borrowings. Pursuant to the Company's overall business
strategy, a substantial portion of the Company's borrowings will be short-term
or adjustable-rate. The Company's borrowings are expected to be primarily
reverse repurchase agreements, but in the future may also be obtained through
loan agreements, warehouse lines of credit, Dollar-Roll Agreements, and other
credit facilities with institutional lenders and issuance of debt securities
such as commercial paper, medium-term notes, CMOs and senior or subordinated
notes. The Company intends to enter into financing transactions only with
institutions that it believes are sound credit risks and to follow other
internal policies designed to limit its credit and other exposure to financing
institutions. The Company will only enter into repurchase agreements
transactions with counter-parties rated investment grade by a nationally
recognized rating service.

The Company anticipates that, upon repayment of each borrowing in the form
of a reverse repurchase agreement, the collateral will immediately be used for
borrowing in the form of a new reverse repurchase agreement. The Company has
not at the present time entered into any commitment agreements under which a
lender would be required to enter into any reverse repurchase agreements
during a specified period of time, nor does the Company presently plan to have
liquidity facilities with commercial banks. See "Risk Factors--No Current
Borrowing Arrangements." The Company, however, may enter into such commitment
agreements in the future if deemed favorable to the Company. The Company will
enter into reverse repurchase agreements primarily with national broker-
dealers, commercial banks and other lenders that typically offer such
financing. The Company will enter into collateralized borrowings only with
financial institutions meeting credit standards approved by the Company's
Board of Directors, including a majority of Unaffiliated Directors, and
monitor the financial condition of such institutions on a regular basis.

39
<PAGE>

A reverse repurchase agreement, although structured as a sale and repurchase
obligation, acts as a financing under which the Company effectively pledges
its Mortgage Assets as collateral to secure a short-term loan. Generally, the
other party to the agreement will make the loan in an amount equal to a
percentage of the market value of the pledged collateral. At the maturity of
the reverse repurchase agreement, the Company is required to repay the loan
and, correspondingly, receives back its collateral. While used as collateral,
Mortgage Assets continue to pay principal and interest that inure to the
benefit of the Company. In the event of the insolvency or bankruptcy of the
Company, certain reverse repurchase agreements may qualify for special
treatment under the Bankruptcy Code, the effect of which would be, among other
things, to allow the creditor under such agreements to avoid the automatic
stay provisions of the Bankruptcy Code and to foreclose on the collateral
agreements without delay. In the event of the insolvency or bankruptcy of a
lender during the term of a reverse repurchase agreement, the lender may be
permitted under applicable insolvency laws, to repudiate the contract, and the
Company's claim against the lender for damages therefrom may be treated simply
as one of an unsecured creditor. In addition, if the lender is a broker or
dealer subject to the Securities Investor Protection Act of 1970, or an
insured depositary institution subject to the Federal Deposit Insurance Act,
the Company's ability to exercise its rights to recover its securities under a
reverse repurchase agreement or to be compensated for any damages resulting
from the lender's insolvency may be further limited by those statutes. These
claims would be subject to significant delay and, if and when received, may be
substantially less than the damages actually suffered by the Company.

The Company expects that substantially all of its borrowing agreements will
require the Company to deposit additional collateral in the event the market
value of existing collateral declines, which may require the Company to sell
Mortgage Assets to reduce the borrowings. The Company liquidity management
policy is designed to maintain a cushion of equity sufficient to provide
required liquidity to respond to the effects under its borrowing arrangements
of interest rate movements and changes in market value of its Mortgage Assets,
as described above. However, a major disruption of the reverse repurchase or
other market relied on by the Company for short-term borrowings would have a
material adverse effect on the Company unless the Company were able to arrange
alternative sources of financing on comparable terms. See "Risk Factors--
Substantial Leverage and Potential Net Interest and Operating Losses in
Connection With Borrowings" and "--Interest Rate Fluctuations May Decrease Net
Interest Income."

CREDIT RISK MANAGEMENT POLICY

The Company will review credit risk and other risks of loss associated with
each investment. In addition, the Company will seek to diversify the Company's
portfolio of Mortgage Assets to avoid undue geographic, insurer, industry and
certain other types of concentrations. The Company's Board of Directors will
monitor the overall portfolio risk and determine appropriate levels of
provision for loss.

With respect to its Mortgage Securities, the Company will be exposed to
various levels of credit and special hazard risk, depending on the nature of
the underlying Mortgage Assets and the nature level of credit enhancements
supporting such securities. Each of the Mortgage Assets acquired by the
Company will have some degree of protection from normal credit losses. Agency
Certificates are covered by credit protection in the form of a 100% guarantee
from a government sponsored entity (Fannie Mae, FHLMC or GNMA). Privately
Issued Certificates represent interests in pools of residential mortgage loans
with partial credit enhancement. Credit loss protection for Privately Issued
Certificates is achieved through the subordination of other interests in the
pool to the interest held by the Company, through pool insurance or through
other means. The degree of credit protection varies substantially among
Privately Issued Certificates.

The Company anticipates that at least 50% of the Company's total Mortgage
Assets will be Agency Certificates or carry a AAA or have a comparable rating
from one of the Rating Agencies. The Company further anticipates that at least
75% of the Company's total Mortgage Assets will be comprised of Agency
Certificates or have at least an A rating from one of the Rating Agencies. The
Company anticipates that Other Mortgage Assets will not constitute more than
25% of the Mortgage Asset portfolio's value; such investments will not be

40
<PAGE>

made by the Company unless they are determined by the Manager to be of
comparable quality to a High Quality Mortgage Security. The Company intends to
structure its portfolio to maintain a minimum weighted average rating
(including the Manager's deemed comparable ratings for unrated Mortgage Assets
based on a comparison to rated Mortgage Securities with like characteristics)
of at least AA (or a comparable rating) by at least one of the Rating
Agencies. However, there can be no assurance that such structure will be
achieved and the Company is not obligated to liquidate any assets to achieve
its desired weighted average rating.

The Company will review the quality of the Mortgage Loans at the time of
acquisition and on an ongoing basis. During the time it holds Mortgage Loans,
the Company will be subject to risks of borrower defaults and bankruptcies and
special hazard losses (such as those occurring from earthquakes or floods)
that are not covered by standard hazard insurance. However, the Company will
generally obtain credit enhancements such as mortgage pool or special hazard
insurance for its Mortgage Loans, and individual Mortgage Loans may be covered
by FHA insurance, VA guarantees or private mortgage insurance and, to the
extent securitized into Agency Certificates, by such government sponsored
entity obligations or guarantees.

Compliance with the credit risk management policy guidelines shall be
determined at the time of purchase of Mortgage Assets (based on the most
recent valuation utilized by the Company) and will not be affected by events
subsequent to such purchase, including, without limitation, changes in
characterization, value or rating of any specific Mortgage Assets or economic
conditions or events generally affecting any Mortgage Assets of the type held
by the Company.

ASSET/LIABILITY MANAGEMENT POLICIES

Interest Rate Risk Management Policy. To the extent consistent with its
election to qualify as a REIT, the Company will follow an interest rate risk
management policy intended to mitigate the negative effects of major interest
rate changes. The Company intends to minimize its interest rate risk from
borrowings by attempting to match the maturity of its debts to the interest
rate adjustment periods on its Mortgage Assets. Under normal market
conditions, the Company will attempt to keep the difference between the
weighted average time to "reset" on its Mortgage Assets to the weighted
average time to reset on its debts to 90 days or less, taking into account all
hedging transactions, although there can be no assurance that the Company will
be able to limit such "reset" periods. This policy will be reviewed by the
Company's Board of Directors if the Company incurs long-term non-callable
borrowings and as market conditions change. In addition to "reset" periods,
the Company also intends to manage differences in interest rate indices
between its Mortgage Assets and borrowings. See "Risk Factors--Failure to
Successfully Manage Interest Rate Risks May Adversely Affect Results of
Operations."

The Company's interest rate risk management policy is formulated with the
intent to offset the potential adverse effects resulting from rate adjustment
limitations on its Mortgage Assets and the differences between interest rate
adjustment indices and interest rate adjustment periods of its adjustable-rate
Mortgage Assets and related borrowings. The Company's anticipates being able
to adjust the average maturity period of such borrowings on an ongoing basis
by changing the mix of maturities and interest rate adjustment periods as
borrowings come due and are renewed. Through use of these procedures, the
Company will seek to minimize any differences between interest rate adjustment
periods of adjustable-rate Mortgage Assets and related borrowings that may
occur.

In general, the Company intends to mitigate lifetime cap risk associated
with its adjustable-rate Mortgage Assets. The policy will be to attempt to
limit the effective interest rate on substantially all of the Company's
liabilities as a whole to a rate equal to the weighted average lifetime cap of
its adjustable-rate Mortgage Assets. Under current market conditions, the
Company does not intend to enter into transactions to mitigate its periodic
cap risk. The Company will manage this risk through its leverage and
asset/liability policies.

The Company intends to purchase from time to time interest rate caps,
interest rate swaps and similar instruments to attempt to mitigate the risk of
the cost of its variable-rate liabilities increasing at a faster rate than the
earnings on its Mortgage Assets during a period of rising rates. In this way,
the Company intends generally

41
<PAGE>

to hedge as much of the interest rate risk as is in its best interests, given
the cost of such hedging transactions and the need to maintain the Company's
status as a REIT. This determination may result in the Company bearing a level
of interest rate risk that could otherwise be hedged when the Company
believes, based on all relevant facts, that bearing such risk is advisable.
The Company may also, to the extent consistent with its compliance with the
REIT Provisions of the Code and Maryland law, utilize financial futures
contracts, options and forward contracts as a hedge against future interest
rate changes. The Company will not invest in financial futures contracts or
options thereon that would cause the Manager or the Company to have to
register under the Commodities Exchange Act. The Company's hedging strategy
may lower the earnings and dividends of the Company in the short-term in order
to further the objective of maintaining competitive levels of earnings and
dividends over the long-term. The Company does not intend to hedge for
speculative purposes.

The Company may elect to conduct a portion of its hedging operations through
one or more subsidiary corporations that would not be a Qualified REIT
Subsidiary and would be subject to federal and state income taxes. In order to
comply with the nature of asset tests applicable to the Company as a REIT, the
value of the securities of any such subsidiary held by the Company must be
limited to less than 5% of the value of the Company's total Mortgage Assets as
of the end of each calendar quarter and no more than 10% of the voting
securities of any such subsidiary may be owned by the Company. See "Federal
Income Tax Consequences--Requirements for Qualification as a REIT--Asset
Tests." A taxable subsidiary would not elect REIT status and would distribute
any net profit after taxes to the Company and its other stockholders. Any
dividend income received by the Company from any such taxable subsidiary
(combined with all other income generated from the Company's Mortgage Assets,
other than Qualified REIT Real Estate Assets) must not exceed 25% of the gross
income of the Company. See "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Gross Income Tests."

Prepayment Risk Management Policy. The Company will seek to minimize the
effects of faster or slower than anticipated prepayment rates through
structuring a diversified portfolio with a variety of prepayment
characteristics, investing in Mortgage Assets with prepayment prohibitions and
penalties, investing in certain Mortgage Security structures that have
prepayment protections, and balancing Mortgage Assets purchased at a premium
with Mortgage Assets purchased at a discount. The Company intends to invest in
Mortgage Assets that on a portfolio basis do not have significant purchase
price premiums. Under normal market conditions, the Company will seek to keep
the aggregate capitalized purchase premium of the portfolio to 3% or less. In
addition, the Company may in the future purchase Principal Only Derivatives to
a limited extent as a hedge against prepayment risks. Prepayment risk will be
monitored by the Manager and the Company's Board of Directors through periodic
review of the impact of a variety of prepayment scenarios on the Company's
revenues, net earnings, dividends, cash flows and net balance sheet market
value.

The Company believes that it has developed a cost-effective asset/liability
management program to mitigate interest rate and prepayment risks. However, no
strategy can completely insulate the Company from interest rate changes,
prepayment risks and defaults by Counter-parties. Further, as noted above,
certain of the federal income tax requirements that the Company must satisfy
to qualify as a REIT limit the Company's ability to fully hedge its interest
and prepayment risks. The Company will monitor carefully, and may have to
limit, its asset/liability management program to assure that it does not
realize excessive hedging income, or hold hedging Mortgage Assets having
excess value in relation to total Mortgage Assets, which would result in the
Company's disqualification as a REIT or, in the case of excess hedging income,
the payment of a penalty tax for failure to satisfy certain REIT income tests
under the Code, provided such failure was for reasonable cause. See "Federal
Income Tax Consequences--Requirements for Qualification as a REIT." In
addition, asset/liability management involves transaction costs that increase
dramatically as the period covered by the hedging protection increases.
Therefore, the Company may be prevented from effectively hedging its interest
rate and prepayment risks.

MORTGAGE LOAN SECURITIZATION TECHNIQUES

The Company will seek to contract with conduits, financial institutions,
mortgage bankers, investment banks and others to purchase Mortgage Loans that
they are originating. The Company anticipates that it will have

42
<PAGE>

sufficient purchasing power in some circumstances to induce origination firms
to originate Mortgage Loans to the Company's specifications. The Company
intends to enhance the value and liquidity of all the Mortgage Loans it
acquires by securitizing the Mortgage Loans into Mortgage Securities in the
manner which will best meet its own needs.

In addition to creating Mortgage Securities from the Mortgage Loans in its
portfolio, the Company may also from time to time "re-securitize" portions of
its Mortgage Securities portfolio. In a resecuritization transaction, Mortgage
Securities rather than Mortgage Loans are used as collateral to create new
Mortgage Securities. This would typically be done as the Mortgage Loans
underlying the securities improve in credit quality through seasoning, as
values rise on the underlying properties or when the credit quality of a
junior class of Mortgage Security improves due to prepayment of more senior
classes. Such transactions can result in improved credit ratings, higher
market values and lowered borrowing costs.

The Company may conduct its securitization activities through one or more
taxable or Qualified REIT Subsidiaries formed for such purpose. The Company
does not intend to conduct its securitization activities through the Manager
or the Manager's Affiliates.

OTHER POLICIES

The Company may purchase stock in other mortgage REITs or stock in similar
companies when the Company believes that such purchases will yield relatively
attractive returns on capital employed. When the stock market valuations of
such companies are low in relation to the market value of their assets, the
Company believes that such stock purchases can be a way for the Company to
acquire an interest in a pool of Mortgage Assets at an attractive price. The
Company does not, however, presently intend to invest in the securities of
other issuers for the purpose of exercising control or to underwrite
securities of other issuers.

The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act. The Company does not currently
intend to (i) originate Mortgage Loans or (ii) offer securities in exchange
for real property.

FUTURE REVISIONS IN POLICIES AND STRATEGIES

The Company's Board of Directors has established the investment policies,
the operating policies and the strategies set forth in this Prospectus. The
Board of Directors has the power to modify or waive such policies and
strategies without the consent of the stockholders to the extent that the
Board of Directors (including a majority of the Unaffiliated Directors)
determines that such modification or waiver is in the best interests of
stockholders. Among other factors, developments in the market that affect the
policies and strategies mentioned herein or which change the Company's
assessment of the market may cause the Company's Board of Directors to revise
its policies and strategies. However, if such modification or waiver relates
to the relationship of, or any transaction between, the Company and the
Manager or any Affiliate of the Manager, the approval of a majority of the
Unaffiliated Directors is also required.

LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company or the
Manager is a party or to which any property of the Company or the Manager is
subject. Litigation was recently commenced against the Company by a company
with a similar name requesting that the Company not operate under the name
"Apex Mortgage Capital." See "Risk Factors--Litigation."

From time to time the TCW Group is involved in litigation in connection with
its operations, including litigation involving the operations of the MBS
Group. Such litigation has included certain senior officers of the TCW Group,
including certain of the officers of the Company and the Manager, as
defendants. The Company believes that there are no legal proceedings that
would materially adversely affect the Manager's or the Company's executive
officers' ability to manage the Company.

43
<PAGE>

MANAGEMENT OF THE COMPANY

DIRECTORS AND EXECUTIVE OFFICERS

The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Philip A. Barach............ 45 President and Chief Executive Officer
Jeffrey E. Gundlach......... 39 Vice Chairman of the Board, Chief
Investment Officer
Daniel K. Osborne........... 33 Executive Vice President, Chief Operating
Officer and Chief Financial Officer
Joseph J. Galligan.......... 38 Senior Vice President
Michael E. Cahill........... 46 Secretary
</TABLE>

Philip A. Barach. Mr. Barach is President, Chief Executive Officer and a
Director of the Company. Mr. Barach is also a Group Managing Director and Chief
Investment Officer of Investment Grade Fixed Income of the TCW Group and the
Manager. Mr. Barach is a member of the TCW Group's MBS Group. Mr. Barach joined
TCW in 1987 after being employed by Sun Life Insurance Company, where he was
Senior Vice President and Chief of Investments. Previously, Mr. Barach served
as head of Fixed Income Investments for the State of California Retirement
System. Mr. Barach attended the Hebrew University of Jerusalem, where he
received a B.A. degree in International Relations and an M.B.A. degree in
Finance.

Jeffrey E. Gundlach. Mr. Gundlach is Chief Investment Officer and Vice
Chairman of the Board of the Company. Mr. Gundlach is also a Group Managing
Director of the TCW Group and the Manager. Mr. Gundlach has been with the TCW
Group since 1985. Previously, Mr. Gundlach was employed by Transamerica
Corporation's Property/Casualty Insurance division, where he was a Senior Loss
Reserve Analyst responsible for investment discount and funding strategies. Mr.
Gundlach is also a member of the TCW Group's MBS Group. Mr. Gundlach is a
graduate of Dartmouth College, holding B.A. degrees in Mathematics and
Philosophy (summa cum laude). He also attended Yale University as a Ph.D.
candidate in Mathematics.

Daniel K. Osborne. Mr. Osborne is Executive Vice President, Chief Operating
Officer and Chief Financial Officer of the Company. Mr. Osborne is also a
Senior Vice President of the TCW Group and the Manager. Mr. Osborne joined the
TCW Group in 1994 as part of the MBS Group, managing fixed income mutual funds.
Prior to joining TCW, from 1992 to 1994, Mr. Osborne was a Vice President of
ASR Investments Corporation ("ASR"), a publicly held REIT investing in Mortgage
Assets. At ASR, Mr. Osborne was responsible for asset/liability management and
the supervision and preparation of public reporting. Prior to his employment
with ASR, Mr. Osborne was a Certified Public Accountant with Deloitte & Touche
LLP specializing in REITs, mortgage securities and publicly held companies. He
holds a B.S. degree in Accounting from Arizona State University.

Joseph J. Galligan. Mr. Galligan is Senior Vice President of the Company.
Prior to joining the TCW Group in 1991, Mr. Galligan was a Vice President at
Smith Barney in the Mortgage-Backed Specialist Group. Prior to that, he spent
five years at First Boston as Vice President in the same area. In addition, Mr.
Galligan spent over three years at Scudder Stevens & Clark as a Portfolio
Manager/Trader. He holds a B.S. degree in Economics with a concentration in
Finance from the Wharton School of Business at the University of Pennsylvania.
Mr. Galligan is a Chartered Financial Analyst.

Michael E. Cahill. Mr. Cahill is the Secretary of the Company. Mr. Cahill is
a Managing Director and General Counsel of the Manager, TCW and certain of its
Affiliates. Prior to joining the TCW Group in 1991, Mr. Cahill was Senior Vice
President and General Counsel of Act III Communications. Previously, he was in
private corporate law practice with O'Melveny & Myers and, prior to that, with
Shenas, Robbins, Shenas & Shaw in San Diego. He is a member of the State Bar of
California and of the Province of Ontario and is admitted to various courts,
including the U.S. Supreme Court. Mr. Cahill holds B.A. degrees in Mathematics
and Philosophy from Bishops University, Quebec, an LL.M. degree from Harvard
University and an LL.B. degree from Osgoode Hall Law School, York University,
Toronto.

44
<PAGE>

The directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Marc I. Stern............... 53 Chairman of the Board
Jeffrey E. Gundlach(1)...... 39 Vice Chairman of the Board
Philip A. Barach(1)......... 45 Director
John C. Argue............... 65 Proposed Director
Carl C. Gregory, III........ 49 Proposed Director
Peter G. Allen.............. 39 Proposed Director
John A. Gavin............... 65 Proposed Director
</TABLE>
- --------
(1) See above for certain biographical information regarding Messrs. Barach
and Gundlach.

Marc I. Stern. Mr. Stern is Chairman of the Board of Directors of the
Company. Mr. Stern is Vice Chairman of the Board of Directors of the Manager
and TCW Asset Management Company and a Director of TCW, Trust Company of the
West and TCW Funds Management, Inc. ("TFMI"). Mr. Stern is also President of
TCW and TFMI and Executive Vice President and Group Managing Director of Trust
Company of the West. Mr. Stern is responsible for the TCW Group's
international operations and is Chairman of TCW Americas Development, Inc.,
TCW Asia, Ltd. and TCW London International, Limited. Mr. Stern joined the TCW
Group in 1990. Previously, Mr. Stern was President of Broad, Inc., Managing
Director and Chief Administrative Officer of the Henley Group, Inc. and Senior
Vice President of Allied-Signal, Inc. and related entities. Prior to holding
such positions, Mr. Stern was associated with the law firm of Debevoise &
Plimpton. Mr. Stern is also Director of Qualcomm, Inc. and the Los Angeles
Music Center Opera, and a member of the Board of Trustees of The Salk
Institute and Dickinson College. Mr. Stern is a member of the State Bars of
New York and New Hampshire. Mr. Stern received a B.A. degree in Political
Science from Dickinson College, an M.A. degree in Political Science from the
Columbia University School of Public Law and Government, and a J.D. degree
from the Columbia University School of Law.

John C. Argue. Mr. Argue has consented to become a Director of the Company
upon completion of the Offering. Mr. Argue is Of Counsel to the law firm of
Argue Pearson Harbison & Myers. Mr. Argue is also a Director of Avery Dennison
Corporation, CalMat Company, Coast Savings Financial Inc. and Coast Federal
Bank. He is an advisory director of LAACO Ltd. Mr. Argue is a Trustee of the
TCW Galileo Family of Funds, the TCW Convertible Securities Fund, Inc. and the
TCW/DW Family of Funds. He is Chairman of the Rose Hills Foundation.

Carl C. Gregory, III. Mr. Gregory has consented to become a Director of the
Company upon completion of the Offering. Mr. Gregory has been Managing Partner
of American Western Partners since 1995. He was Chairman, Chief Executive
Officer and a Director of MIP Properties, Inc. from 1991 through 1995. Prior
to 1991, Mr. Gregory was President of American Western Realty Corporation. Mr.
Gregory has been Chairman of the Board of Directors of West Capital Financial
Services Corp. since 1996, a Director of Pacific Gulf Properties, Inc. since
1997 and a Director of House of Fabrics since 1996. Mr. Gregory received a
B.A. degree in Accounting from Southern Methodist University and an M.B.A.
degree in Finance from the University of Southern California.

Peter G. Allen. Mr. Allen has consented to become a Director of the Company
upon completion of the Offering. Mr. Allen is an investment banker who now
works as an independent investor and advisor. Previously, he worked at Morgan
Stanley & Co. Incorporated for 15 years where he was the Managing Director
responsible for the firm's investment banking operations in the southwestern
United States. During his tenure at Morgan Stanley, Mr. Allen advised a number
of companies in a wide variety of strategic and financial transactions. Mr.
Allen was also the Managing Partner at Chartwell Partners from January 1997
through July 1997. Mr. Allen received his B.A. degree in economics, summa cum
laude, at Yale University in 1980 and his M.B.A. degree at Stanford University
in 1984.

45
<PAGE>

John A. Gavin. Mr. Gavin has consented to become a Director of the Company
upon completion of the Offering. Mr. Gavin is founder and chairman of Gamma
Services Corporation and a principal of Gavin, Dailey and Partners, both
international capital and consulting firms. Since 1995, he has been affiliated
with Hicks, Muse, Tate & Furst (Latin America) as Managing Director. Mr. Gavin
is a member of the board of directors of Atlantic Richfield Company (ARCO);
Dresser Industries; Pinkerton's, Inc.; International Wire Group; Fedco, Inc;
and KAP Resources. Mr. Gavin is also a trustee of Hotchkis & Wiley Funds. From
1981 to 1986, Mr. Gavin was the United States Ambassador to Mexico. Mr. Gavin
graduated from Stanford University with a degree in Economic History of Latin
America.

After the completion of the Offering, the Board of Directors of the Company
will be divided into three classes, with the number of directors in each class
as nearly equal in number as possible. Each class of directors will contain at
least one affiliated director and at least one Unaffiliated Director. After
the initial staggering period, each director shall serve for a term ending on
the date of the third annual meeting of stockholders following the annual
meeting at which such director was elected. All officers serve at the
discretion of the Company's Board of Directors. Although the Company may have
salaried employees, it currently has no such employees. The Company will pay
an annual director's fee to each Unaffiliated Director of $10,000, a fee of
$1,250 for each meeting of the Board of Directors attended by each
Unaffiliated Director and reimbursement of costs and expenses of all directors
for attending such meetings. Affiliated directors will not be separately
compensated by the Company.

The Management Agreement provides that the Manager will assume principal
responsibility for managing the affairs of the Company. Therefore, the
officers of the Company, in their capacities as such, are not expected to
devote substantial portions of their time to the affairs of the Company.
However, in their capacities as officers or employees of the Manager, or its
Affiliates, they will devote such portion of their time to the affairs of the
Manager as is required for the performance of the duties of the Manager under
the Management Agreement. See "Risk Factors--Conflicts of Interest Between the
Company and the Manager and Its Affiliates--Conflicts Relating to the Manager
Rendering Services to Others."

The Bylaws of the Company provide that the Board of Directors shall have not
less than three or more than nine members, as determined from time to time by
the existing Board of Directors. The Board of Directors will initially have
seven members consisting of three directors affiliated with the TCW Group and
four Unaffiliated Directors. The Bylaws further provide that except in the
case of a vacancy, the majority of the members of the Board of Directors and
of any committee of the Board of Directors will at all times after the
issuance of the shares of Common Stock in this Offering be Unaffiliated
Directors. Vacancies occurring on the Board of Directors among the
Unaffiliated Directors will be filled by the vote of a majority of the
directors, including a majority of the Unaffiliated Directors.

The Charter of the Company provides for the indemnification of the directors
and officers of the Company to the fullest extent permitted by Maryland law.
Maryland law generally permits indemnification of directors and officers
against certain costs, liabilities and expenses that any such person may incur
by reason of serving in such positions unless it is proved that: (i) the act
or omission of the director or officer was material to the cause of action
adjudicated in the proceeding and was committed in bad faith or was the result
of active and deliberate dishonesty; (ii) the director or officer actually
received an improper personal benefit in money, property or services; or (iii)
in the case of criminal proceedings, the director or officer had reasonable
cause to believe that the act or omission was unlawful. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.

The Charter of the Company provides that the personal liability of any
director or officer of the Company to the Company or its stockholders for
money damages is limited to the fullest extent allowed by the statutory or
decisional law of the State of Maryland as amended or interpreted. Maryland
law authorizes the limitation of liability of directors and officers to
corporations and their stockholders for money damages except (i) to the extent
that it is proved that the person actually received an improper benefit in
money, property, or services for

46
<PAGE>

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 the person is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated.

EXECUTIVE COMPENSATION

The Company has not paid, and does not intend to pay, any annual
compensation to the Company's executive officers for their services as
executive officers. However, the Company may from time to time, in the
discretion of the Board of Directors, grant options to purchase shares of the
Company's Common Stock to the Manager, executive officers and directors of the
Company pursuant to the Company's 1997 Stock Option Plan. See "--Stock
Options" below.

STOCK OPTIONS

The Company has adopted a stock option plan (the "1997 Stock Option Plan")
that provides for the grant of both qualified incentive stock options ("ISOs")
that meet the requirements of Section 422 of the Code, and non-qualified stock
options, stock appreciation rights and dividend equivalent rights. ISOs may be
granted to the officers and key employees of the Company, if any. Non-
qualified stock options may be granted to the Manager, directors, officers and
any key employees of the Company and to the directors, officers and key
employees of the Manager. The exercise price for any option granted under the
1997 Stock Option Plan may not be less than 100% of the fair market value of
the shares of Common Stock at the time the option is granted. The purpose of
the 1997 Stock Option Plan is to provide a means of performance-based
compensation to the Manager in order to attract and retain qualified personnel
and to provide an incentive to others whose job performance affects the
Company. The 1997 Stock Option Plan will become effective upon the closing of
the Offering.

Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the 1997 Stock Option Plan authorizes the grant of options to
purchase an aggregate of up to 10% of the outstanding shares of the Company's
Common Stock, but not more than 1,000,000 shares of Common Stock. If an option
granted under the 1997 Stock Option Plan expires or terminates, the shares
subject to any unexercised portion of that option will again become available
for the issuance of further options under the 1997 Stock Option Plan. Unless
previously terminated by the Board of Directors, the 1997 Stock Option Plan
will terminate ten years from its effective date, and no options may be
granted under the 1997 Stock Option Plan thereafter.

The 1997 Stock Option Plan will be administered by a committee of the Board
of Directors comprised entirely of Unaffiliated Directors (the "Compensation
Committee"). Except for the grant of options issuable upon completion of the
Offering described below, options granted under the 1997 Stock Option Plan
will become exercisable in accordance with the terms of the grant made by the
Compensation Committee. The Compensation Committee has discretionary authority
to determine at the time an option is granted whether it is intended to be an
ISO or a non-qualified option, and when and in what increments shares of
Common Stock covered by the option may be purchased.

Under current law, ISOs may not be granted to any director of the Company
who is not also a full-time employee or to directors, officers and other
employees of entities unrelated to the Company. In addition, no options may be
granted under the 1997 Stock Option Plan to any person who, assuming exercise
of all options held by such person, would own or be deemed to own more than
9.8% of the outstanding shares of Common Stock of the Company.

Each option must terminate no more than ten years from the date it is
granted. Options may be granted on terms providing that they will be
exercisable in whole or in part at any time or times during their respective
terms, or only in specified percentages at stated time periods or intervals
during the term of the option.

The exercise price of any option granted under the 1997 Stock Option Plan is
payable in full (i) by cash, (ii) by surrender of shares of the Company's
Common Stock having a market value equal to the aggregate

47
<PAGE>

exercise price of all shares to be purchased, (iii) by any combination of the
foregoing, or (iv) by a full recourse promissory note executed by the
optionholder. The terms of the promissory note may be changed from time to
time by the Company's Board of Directors to comply with applicable regulations
or other relevant pronouncements of the Service or the Commission.

The Company's Board of Directors may, without affecting any outstanding
options, from time to time revise or amend the 1997 Stock Option Plan, and may
suspend or discontinue it at any time. However, no such revision or amendment
may increase the number of shares of Common Stock subject to the 1997 Stock
Option Plan (with the exception of adjustments resulting from changes in
capitalization), change the class of participants eligible to receive options
granted under the 1997 Stock Option Plan or modify the period within which or
the terms upon which the options may be exercised without stockholder
approval.

STOCK OPTIONS OUTSTANDING

The following table sets forth the stock options granted under the 1997
Stock Option Plan effective on the closing of the Offering.

STOCK OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------- ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM(3)
OPTIONS GRANTED TO PRICE(2) EXPIRATION ---------------------
NAME GRANTED(1) EMPLOYEES ($/SHARE) DATE 5% ($) 10% ($)
- ---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Philip A. Barach........ 40,000 25.8% $15.00 (4) $ 377,337 $ 956,247
Jeffrey E. Gundlach..... 40,000 25.8% 15.00 (4) 377,337 956,247
Daniel K. Osborne....... 35,000 22.6% 15.00 (4) 330,170 836,715
Joseph J. Galligan...... 25,000 16.1% 15.00 (4) 235,835 597,653
Michael E. Cahill....... 15,000 9.7% 15.00 (4) 141,501 358,593
Marc I. Stern........... 30,000 -- 15.00 (4) 283,003 717,184
Other(5)................ 115,000 -- 15.00 (4) 1,084,843 2,749,206
</TABLE>
- --------
(1) The options granted are exercisable starting 14 months after the date of
grant.

(2) The exercise price and tax withholding obligations incurred upon exercise
of the options may be paid by the option holder by delivering already
owned shares of Company Common Stock, including those which are issuable
upon exercise of the options.

(3) The dollar amounts under these columns are the result of calculations at
5% and 10% compounded annual rates set by the Commission, and therefore
are not intended to forecast future appreciation, if any, in the price of
Common Stock.

(4) December 3, 2007.

(5) These options have been granted to officers and employees of the Manager.

In addition, each Unaffiliated Director has received an initial grant of
options to purchase up to 25,000 shares of Common Stock at the initial public
offering price. These options will expire ten years from the effective date of
the 1997 Stock Option Plan. Any Unaffiliated Director newly elected to the
Board of Directors thereafter may receive an identical initial grant at the
fair market value on the date of grant.

48
<PAGE>

THE MANAGER

The Company has no ownership interest in the Manager. The Manager, a
California corporation, is a wholly-owned subsidiary of TCW. The Manager was
established in 1992 and the TCW Group began operating in 1971 through one of
its affiliates.

The Manager will be responsible for the day-to-day operations of the Company
and will perform such services and activities relating to the Mortgage Assets
and operations of the Company as may be appropriate. At all times, the Manager
will be subject to the direction and oversight of the Company's Board of
Directors and will have only such functions and authority as the Company may
delegate to it. The Manager will be primarily involved in two activities: (i)
asset/liability management--acquisition, financing, hedging, management and
disposition of Mortgage Assets, including credit and prepayment risk
management; and (ii) capital management--structuring, analysis, capital
raising and investor relations activities. In conducting these activities, the
Manager will formulate operating strategies for the Company, arrange for the
acquisition of Mortgage Assets by the Company, arrange for various types of
financing for the Company, monitor the performance of the Company's Mortgage
Assets and provide certain administrative and managerial services in
connection with the operation of the Company. The Manager will be required to
manage the business affairs of the Company in conformity with the policies
that are approved and monitored by the Company's Board of Directors. The
Manager will be required to prepare regular reports for the Company's Board of
Directors, which will review the Company's acquisitions of Mortgage Assets,
portfolio composition and characteristics, credit quality, performance and
compliance with policies previously approved by the Company's Board of
Directors. See "--The Management Agreement" below and "Business and Strategy--
Management Policies and Programs."

The Manager has not previously managed a REIT. In particular, the Manager
has not previously managed a highly-leveraged pool of Mortgage Assets nor does
the Manager have experience in complying with the asset limitations imposed by
the REIT Provisions of the Code. Although management of the Company and the
Manager have experience in managing mortgage capital, there can be no
assurance that the past experience of the executive officers of the Company
and the Manager will be appropriate to the business of the Company. Further,
the experience of the Manager and the TCW Group should not be viewed as a
reliable gauge of the potential success of the Company. See "Risk Factors--
Lack of Prior Experience."

The directors and senior executive officers of the Manager are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Robert A. Day............... 53 Chairman of the Board and Chief Executive
Officer
Thomas E. Larkin, Jr. ...... 57 Vice Chairman of the Board
Marc I. Stern(1)............ 53 Vice Chairman of the Board
Alvin R. Albe, Jr. ......... 44 Director, Executive Vice President--
Finance and Administration
Michael E. Cahill(1)........ 46 Managing Director and General Counsel,
Secretary
David K. Sandie............. 42 Chief Financial Officer and Managing
Director, Assistant Secretary
Hilary G. D. Lord........... 41 Chief Compliance Officer and Managing
Director, Assistant Secretary
Philip A. Barach(1)......... 45 Group Managing Director
Jeffrey E. Gundlach(1)...... 39 Group Managing Director
Daniel K. Osborne(1)........ 33 Senior Vice President
</TABLE>
- --------
(1) See "Management of the Company--Directors and Executive Officers" for
certain biographical information regarding Messrs. Stern, Cahill, Barach,
Gundlach and Osborne.

49
<PAGE>

Robert A. Day. Mr. Day has served as Chairman of the Board and Chief
Executive Officer of the Manager since its inception in 1992. Mr. Day is also
Chairman of the Board and Chief Executive Officer of TCW, Trust Company of the
West and TAMCO, as well as Chairman of the Board of the Oakmont Corporation.
Mr. Day founded Trust Company of the West in 1971. Prior to 1971, Mr. Day was
associated with the investment banking firm of White, Weld & Company in New
York for three years and then formed Cypress Partners. He is Chairman and
President of the W.M. Keck Foundation, a Director of Freeport, McMoRan, Inc.,
and a member of the Board of Trustees of Claremont McKenna College. Mr. Day
received a B.A. degree from Claremont McKenna College.

Thomas E. Larkin, Jr. Mr. Larkin has served as a Vice Chairman of the Board
of the Manager since 1992. Mr. Larkin is also Chairman of the Board of TFMI
(since 1987), Vice Chairman of TAMCO, Director and President of Trust Company
of the West, and Director, Executive Vice President and Group Managing
Director of TCW (all since 1977). Prior to joining the TCW Group in 1977, Mr.
Larkin was Vice President and Director of Client Relations for Crocker
Investment Management Corporation. Prior to that, he was Senior Vice President
and Director of Marketing of Bernstein-Macaulay, Inc. with responsibility for
marketing investment management services. He was previously with Blyth Eastman
Dillon as a New Business Representative in the Employee Benefit Plan
Department. Mr. Larkin is a member of the Board of Trustees of the University
of Notre Dame and Mount Saint Mary's College, is a member of the Board of
Directors of the California Pediatric & Family Medical Center Foundation, the
Los Angeles Orthopaedic Hospital, the Los Angeles Music Center Operating
Company, the Heart & Lung Surgery Foundation, the Los Angeles Sports Council,
and the Board of Regents of Children's Hospital of Los Angeles. He also serves
as a member of the Finance Council of the Archdiocese of Los Angeles and is a
member of the Investment Committees of the Archdiocese of Los Angeles and
Loyola Marymount University. Mr. Larkin received a B.A. degree in Economics
from the University of Notre Dame.

Alvin R. Albe, Jr. Mr. Albe has served as a Director and Executive Vice
President--Finance and Administration of the Manager and TFMI since 1992, and
has held the same positions with TAMCO and Trust Company of the West since
1991. Mr. Albe has also been Executive Vice President--Finance and
Administration of TCW since 1991. Prior to joining the TCW Group in 1991, Mr.
Albe was President of Oakmont Corporation, a privately held corporation which
administers and manages assets for several families and individuals. Mr. Albe
was associated with Oakmont Corporation from 1982 to 1991. Before that, he was
Manager of Accounting at McMoRan Oil and Gas Co., and a Certified Public
Accountant with Arthur Andersen & Co. in New Orleans. Mr. Albe received a B.S.
degree in Accounting from the University of New Orleans.

David K. Sandie. Mr. Sandie has served as Managing Director, Chief Financial
Officer and Assistant Secretary of the Manager since 1992. Mr. Sandie has held
similar positions with TFMI since 1987, TCW since 1986, and TAMCO and Trust
Company of the West since 1984. Prior to joining the TCW Group in 1984, Mr.
Sandie was an Audit Manager with Price Waterhouse & Company, where a
significant portion of his audit experience was with financial service
organizations. Mr. Sandie is a Certified Public Accountant. Mr Sandie received
a B.A. degree in Political Science from the University of California at Los
Angeles and an M.B.A. degree from the University of Southern California.

Hilary G.D. Lord. Ms. Lord has served as a Managing Director, Chief
Compliance Officer and Assistant Secretary of the Manager since 1992. Ms. Lord
also holds such positions with TFMI, TAMCO and Trust Company of the West. Ms.
Lord joined the TCW Group in 1987, having previously been a corporate and
securities attorney with O'Melveny & Myers. Ms. Lord is a member of the Board
of Governors of the Investment Counsel Association of America ("ICAA"), is a
member of the Legal and Regulatory Committee of the ICAA and is a member of
the National Association of Compliance Professionals. Ms. Lord is a member of
the State Bar of California. Ms. Lord received a B.S. degree in Accounting and
Finance from the University of California at Berkeley and an M.B.A. degree and
a J.D. degree from the University of Chicago.

The address of the Manager is 865 South Figueroa Street, Suite 1800, Los
Angeles, California 90017.

50
<PAGE>

THE MANAGEMENT AGREEMENT

The Company will enter into the Management Agreement with the Manager at the
closing of the Offering for an initial term of two years. The Manager will be
primarily involved in two activities: (i) asset/liability management--
acquisition, financing, hedging, management and disposition of Mortgage
Assets, including credit and prepayment risk management; and (ii) capital
management--oversight of the Company's structuring, analysis, capital raising
and investor relations activities. In conducting these activities, the Manager
will formulate operating strategies for the Company, arrange for the
acquisition of Mortgage Assets by the Company, arrange for various types of
financing for the Company, monitor the performance of the Company's Mortgage
Assets and provide certain administrative and managerial services in
connection with the operation of the Company. The Manager will be required to
manage the business affairs of the Company in conformity with the policies
that are approved and monitored by the Company's Board of Directors. The
Manager will be required to prepare regular reports for the Company's Board of
Directors that will review the Company's acquisitions of Mortgage Assets,
portfolio composition and characteristics, credit quality, performance and
compliance with the policies approved by the Company's Board of Directors.

At all times, the Manager will be subject to the direction and oversight of
the Company's Board of Directors and will have only such functions and
authority as the Company may delegate to it. The Manager will be responsible
for the day-to-day operations of the Company and the Company anticipates that
the Manager will perform such services and activities relating to the Mortgage
Assets and operations of the Company as may be appropriate, including:

(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy guidelines by the Company's
Board of Directors;

(ii) assisting the Company in developing criteria for Mortgage Asset
purchase commitments that are specifically tailored to the Company's long-
term investment objectives and making available to the Company its
knowledge and experience with respect to Mortgage Assets;

(iii) representing the Company in connection with the purchase and
commitment to purchase or sell Mortgage Assets, including the accumulation
of Mortgage Loans for securitization and the incurrence of debt;

(iv) arranging for the issuance of Mortgage Securities from a pool of
Mortgage Loans;

(v) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;

(vi) monitoring and providing to the Company's Board of Directors on an
ongoing basis price information and other data, obtained from certain
nationally recognized dealers that maintain markets in Mortgage Assets
identified by the Board of Directors from time to time, and providing data
and advice to the Board of Directors in connection with the identification
of such dealers;

(vii) investing or reinvesting any money of the Company in accordance
with its policies and procedures;

(viii) providing the executive and administrative personnel, office space
and services required in rendering services to the Company;

(ix) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by the Manager and the Company's Board of Directors, including the
collection of revenues and the payment of the Company's debts and
obligations and maintenance of appropriate computer systems to perform such
administrative functions;

(x) providing the Company with general data processing, legal and
administrative services to the extent required to implement the business
strategy of the Company;

51
<PAGE>

(xi) counseling the Company in connection with policy decisions made by
the Board of Directors;

(xii) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies and
to maintain effective relations with such holders;

(xiii) evaluating and recommending hedging strategies to the Company's
Board of Directors and, upon approval by the Board of Directors, engaging
in hedging activities on behalf of the Company, consistent with the
Company's status as a REIT;

(xiv) supervising compliance with the REIT Provisions of the Code and
maintenance of an exemption from the Investment Company Act;

(xv) qualifying and causing the Company to qualify to do business in all
applicable jurisdictions;

(xvi) causing the Company to retain qualified accountants and tax experts
to assist in developing appropriate accounting procedures and testing
systems and to conduct quarterly compliance reviews;

(xvii) providing all actions necessary for compliance by the Company with
all federal, state and local regulatory requirements applicable to the
Company in respect of its business activities, including preparing or
causing to be prepared all financial statements required under applicable
regulations and contractual undertakings and all reports and documents, if
any, required under the Exchange Act;

(xviii) providing all actions necessary to enable the Company to make
required federal, state and local tax filings and reports and generally
enable the Company to maintain its status as a REIT, including soliciting
stockholders for required information to the extent provided in the REIT
Provisions of the Code;

(xix) performing such other services as may be required from time to time
for management and other activities relating to the assets of the Company
as the Board of Directors shall reasonably request or the Manager shall
deem appropriate under the particular circumstances; and

(xx) complying with and using commercially reasonable efforts to cause
the Company to comply with all applicable laws.

Following the initial two-year term, the Management Agreement may be renewed
for additional one-year terms at the discretion of the Unaffiliated Directors,
unless previously terminated by the Company or the Manager upon written
notice. Except in the case of a termination or non-renewal by the Company for
cause, upon termination or non-renewal of the Management Agreement by the
Company, the Company is obligated to pay the Manager a termination or non-
renewal fee, which may be significant. The termination or non-renewal fee
shall be equal to the fair market value of the Management Agreement without
regard to the Company's termination right, as determined by an independent
appraisal. The selection of the independent appraiser shall be subject to the
approval of the Unaffiliated Directors. Neither the fair market value of the
Management Agreement nor the various factors which the appraiser may find
relevant in its determination of the fair market value can be determined at
this time.

The fair market value of the Management Agreement will be affected by
significant variables, including (i) the historical management fees paid to
the Manager, (ii) any projections of future management fees to be paid to the
Manager determined by the independent appraiser, (iii) the relative valuations
of agreements similar to the Management Agreement and (iv) other factors, all
of which may be unrelated to the performance of the Manager.

For illustrative purposes only, if the Company terminated or did not renew
the Management Agreement without cause immediately following a full year of
operations in which the Company paid to the Manager total annual compensation
equal to $2,345,000, the termination or non-renewal fee could potentially
equal between four and eight times the total annual compensation paid to the
Manager, or $9,380,000 and $18,760,000, depending on the valuation of the
independent appraiser at the time of the termination or non-renewal, which the
Company and the Manager expect will be influenced by the valuation of
similarly-situated transactions occurring at or about the same time. If the
total annual compensation amount or the valuation multiple used by the
independent appraiser is higher or lower, the termination or non-renewal fee
would be higher or lower, respectively, than the amounts set forth above.

52
<PAGE>

Since the fair market value of the Management Agreement would be determined by
an independent appraiser at a future date based upon then applicable facts and
circumstances, no such termination or non-renewal fee can be estimated with
mathematical certainty. Any termination or non-renewal fee paid may be
materially greater than the hypothetical examples above and the Company can
provide no assurance at this time as to the amount of any such fee. The
payment of a significant termination or non-renewal fee by the Company to the
Manager would materially adversely affect the cash available for distribution
to the Company's stockholders and may result in material net operating losses
for the period. See "Risk Factors--Possible Significant Termination Fee
Payable to the Manager."

The Management Agreement may be assigned by the Manager to an Affiliate of
TCW without the consent of the Company. The Management Agreement may be
assigned to a non-Affiliate of TCW only with the approval of a majority of the
Unaffiliated Directors.

MANAGER COMPENSATION

The Manager will receive annual base management compensation based on the
Average Net Invested Capital of the Company, payable monthly in arrears, equal
to 3/4 of 1% of Average Net Invested Capital. The term "Average Net Invested
Capital" means for any period (i) the arithmetic average of the sum of the
gross proceeds of the offerings of its equity securities by the Company, after
deducting any underwriting discounts and commissions and other expenses and
costs relating to such offerings, plus the Company's retained earnings (taking
into account any losses incurred) and any non-cash charges or reserves,
including depreciation, mark-to-market adjustments and unrealized credit loss,
computed by taking the average of such values at the end of each month during
such period, plus (ii) any unsecured debt approved by the Unaffiliated
Directors to be included in Average Net Invested Capital. Accordingly,
incurring collateralized debt to finance specific investment purchases does
not necessarily increase Average Net Invested Capital.

The Manager shall also be entitled to receive as incentive compensation for
each fiscal quarter, an amount equal to 30% of the Net Income of the Company,
before incentive compensation, in excess of the amount that would produce an
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%.
The incentive compensation calculation and payment will be made quarterly in
arrears. The term "Return on Equity" is calculated for any quarter by dividing
the Company's Net Income for the quarter by its Average Net Worth for the
quarter. For purposes of calculating the incentive compensation payable, the
definition "Return on Equity" is not related to the actual distributions
received by stockholders or to an individual investor's actual return on
investment. For such calculations, the "Net Income" of the Company means the
taxable income of the Company (including net capital gains, if any) before the
Manager's incentive compensation, net operating loss deductions arising from
losses in prior periods and deductions permitted by the Code in calculating
taxable income for a REIT plus the effects of adjustments, if any, necessary
to record hedging and interest transactions in accordance with GAAP. A
deduction for all of the Company's interest expenses for borrowed funds is
taken into account in calculating Net Income. "Average Net Worth" for any
period means the arithmetic average of the sum of the gross proceeds from any
offering of its equity securities by the Company, before deducting any
underwriting discounts and commissions and other expenses and costs relating
to the offerings, plus the Company's retained earnings (without taking into
account any losses incurred in prior periods) computed by taking the average
of such values at the end of each month during such period.

The ability of the Company to achieve an annualized Return on Equity in
excess of the Ten-Year U.S. Treasury Rate plus 1%, and of the Manager to earn
the incentive compensation described in the preceding paragraph, is dependent
upon the level and volatility of interest rates, the Company's ability to
react to changes in interest rates and to utilize successfully the operating
strategies described herein, and other factors, many of which are not within
the Company's or the Manager's control. The Manager's base compensation shall
be calculated by the Manager within 15 days after the end of each month, and
such calculation shall be promptly delivered to the Company. The Company is
obligated to pay the base compensation within 30 days after the end of each
month. The Manager shall compute the quarterly incentive compensation within
45 days after the end of each fiscal quarter, and the Company shall pay the
incentive compensation with respect to each fiscal quarter within 15 days
following the delivery to the Company of the Manager's written statement
setting forth the

53
<PAGE>

computation of the incentive compensation for such quarter. The Company's
Board of Directors shall review and approve the calculation of base and
incentive compensations paid to the Manager quarterly, one quarter in arrears,
during each scheduled quarterly Board of Directors meeting. Quarterly
incentive compensation will be subject to an annual adjustment commencing in
the second full year of the Company's operation. The Company believes that
this compensation arrangement benefits its stockholders because it ties the
Manager's compensation to Return on Equity and, in periods of low earnings,
the Manager's incentive compensation is reduced or eliminated, thereby
lowering the Company's operating expenses.

Although no management fees will be payable to the Manager solely as a
result of the Offering, the net proceeds of the Offering will result in an
increase in the Company's Average Net Invested Capital, and thus, an increase
in the management fees paid to the Manager. See "Risk Factors--Conflicts of
Interest Between the Company and the Manager and Its Affiliates."

Set forth below for illustrative purposes only is a breakdown of management
fees that might be paid to the Manager under hypothetical circumstances. For
purposes of this illustration, the following is assumed: (i) the net proceeds
from the Offering, after all underwriting discounts and other Offering costs,
are $92,713,080 and (ii) the Company's Net Income (after payment of base
compensation and operating expenses, but prior to the deduction of incentive
compensation) exceeded by $600,000, $5,100,000 and $8,000,000, respectively,
the annualized Return on Equity equal to the average Ten-Year U.S. Treasury
Rate plus 1%.

ANNUAL MANAGER COMPENSATION

<TABLE>
<CAPTION>
INCENTIVE TOTAL
BASE COMPENSATION COMPENSATION COMPENSATION
----------------- ------------ ------------
<S> <C> <C>
$695,000........................................ $ 180,000 $ 875,000
695,000........................................ 1,650,000 2,345,000
695,000........................................ 2,400,000 3,095,000
</TABLE>

The Company emphasizes that the foregoing information is provided for
illustrative purposes only. There will be differences between the Company's
actual Net Income and the compensation paid to the Manager, on the one hand,
and the Net Income and compensation figures set forth above, on the other, and
those differences may be material. There are significant variables in the
determination of actual compensation paid to the Manager, including (i) the
Company's actual Net Income, which will be affected by the Company's ability
to execute its leveraging strategy and interest rate fluctuations, plus other
factors and (ii) fluctuations in the average Ten-Year U.S. Treasury Rate, all
of which may be affected by factors unrelated to the performance of the
Manager.

The Company has adopted a 1997 Stock Option Plan. The Manager and the
directors, officers and any employees of the Company may be granted options
under the Company's 1997 Stock Option Plan. See "Management of the Company--
Stock Options."

Except as set forth in this Prospectus, the Company does not currently
anticipate paying any other fees or compensation to any Affiliate of the
Manager. See "--Certain Relationships; Conflicts of Interest" below.

EXPENSES

The Company will be required to pay all offering expenses (including
accounting, legal, printing, clerical, personnel, filing and other expenses)
incurred by the Company, the Manager or its Affiliates on behalf of the
Company in connection with the Offering, estimated at $1,000,000. This payment
will not be subject to the limitation on expenses to be borne by the Company
as described in the paragraph below.

54
<PAGE>

Subject to the limitations set forth below, the Company will also pay all
operating expenses, except those specifically required to be borne by the
Manager under the Management Agreement, incurred by the Manager under the
Management Agreement. The operating expenses required to be borne by the
Manager include the compensation of the Company's officers and the cost of
office space, equipment and other personnel required for the Company's day-to-
day operations. The expenses that will be paid by the Company will include
(but not necessarily be limited to) the cost of money borrowed by the Company
(including interest), taxes and license fees, issuance and transaction costs
incident to the acquisition, disposition and financing of investments, costs
related to hedging transactions, legal, investigatory, accounting and auditing
fees and expenses, consultants' advisory services with respect to REIT and
other compliance matters, the compensation and expenses of the Company's
Unaffiliated Directors, the costs of making distributions and printing and
mailing proxies and reports to stockholders, costs incurred by employees of
the Manager for travel on behalf of the Company, costs incident to the
issuance of Mortgage Securities, costs incident to the accumulation and
servicing of Mortgage Loans, costs associated with any computer software or
hardware that is used solely for the Company, costs to obtain liability
insurance to indemnify the Manager, the Company's directors and officers and
the Underwriters, the compensations and expenses of the Company's custodian,
transfer agent and registrar, and any extraordinary or non-recurring costs or
charges incurred by the Company, if any. The following expenses required to be
paid by the Company that are attributable to its operations shall be limited
to an amount per year equal to the greater of 2% of the Average Net Invested
Capital of the Company or 25% of its Net Income for that year:

(i) all insurance costs incurred by the Company or any subsidiary of the
Company, including any costs to obtain liability or other insurance to
indemnify the Manager and underwriters of any securities of the Company;

(ii) expenses connected with payments of dividends or interest or
distributions in any other form made or caused to be made by the Board of
Directors to holders of the securities of the Company or any subsidiary of
the Company;

(iii) all expenses of third-parties pertaining to communications to
holders of equity securities or debt securities of the Company or any
subsidiary of the Company and the other bookkeeping and clerical work
necessary in maintaining relations with holders of such securities and in
complying with the continuous reporting and other requirements of
governmental bodies or agencies, including any costs of computer services
in connection with this function, the cost of printing and mailing
certificates for such securities and proxy solicitation materials and
reports to holders of the Company's or any subsidiary's securities and
reports to third-parties required under any indenture to which the Company
or any subsidiary of the Company is a party;

(iv) custodian's, transfer agent's and registrar's fees and charges;

(v) compensation, fees and expenses paid to Unaffiliated Directors of the
Company or any subsidiary of the Company, the cost of director and officer
liability insurance and premiums for fidelity and errors and omissions
insurance;

(vi) legal, accounting and auditing fees and expenses relating to the
Company's or any subsidiary's operations (excluding litigation-related fees
and expenses);

(vii) expenses relating to any office or office facilities maintained by
the Company or any subsidiary of the Company, exclusive of the office of
the Manager;

(viii) travel and related expenses of directors, officers and employees
of the Manager and of directors, officers and employees of the Company or
any subsidiary of the Company who are also directors, officers or employees
of the Manager, incurred in connection with attending meetings of the Board
of Directors or holders of securities of the Company or any subsidiary of
the Company or performing other business activities that relate to the
Company or any subsidiary of the Company, including expenses allocable to
such meetings or business activities;

55
<PAGE>

(ix) costs associated with computer hardware and software, third-party
information services and office expenses that relate solely to the business
activities of the Company; and

(x) all other expenses regarded as ordinary operating expenses in
accordance with GAAP, exclusive of certain specifically excluded expenses
as described below.

Expenses excluded from the expense limitation and wholly payable by the
Company are (but are not limited to) those incurred in connection with the
accumulation and servicing of Mortgage Loans, the issuance and administration
of Mortgage Securities from pools of Mortgage Loans, the raising of capital,
the acquisition of Mortgage Assets, interest and hedging expenses, taxes and
license fees, non-cash costs, litigation, investigations in connection with
litigation or threatened litigation, base and incentive management
compensation and extraordinary and non-recurring expenses. The determination
of Net Income for purposes of calculating the expense limitation will be the
same as for calculating the Manager's incentive compensation except that it
will include any incentive compensation payable for such period.

Expenses in excess of the expense limitation will be paid and shall not be
recoverable (by reclassification as compensation or otherwise) by the Manager,
unless the Unaffiliated Directors determine that, based upon unusual or non-
recurring factors, a higher level of expenses is justified for such fiscal
year. In that event, such expenses may be recovered by the Manager in
succeeding years to the extent that expenses in succeeding quarters are below
the limitation of expenses. Expense reimbursement will be made monthly,
subject to adjustment at the end of each year.

CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST

In addition to its base management compensation under the Management
Agreement, the Manager will have the opportunity to earn incentive
compensation for each fiscal quarter in an amount equal to 30% of the Net
Income of the Company (before payment of such incentive compensation) in
excess of the amount that would produce on annualized Return on Equity equal
to the Ten-Year U.S. Treasury Rate plus 1%. Quarterly incentive compensation
will be subject to an annual adjustment commencing in the second full year of
the Company's operation. See "--Management Compensation" above. In evaluating
Mortgage Assets for investment and in other operating strategies, an undue
emphasis on the maximization of income at the expense of other criteria, such
as preservation of capital, in order to achieve a higher incentive fee could
result in increased risk to the value of the Company's Mortgage Asset
portfolio. However, the Bylaws of the Company provide that the Board of
Directors shall evaluate the performance of the Manager before entering into
or renewing any management arrangement and that the Unaffiliated Directors
shall determine at least annually that the Manager's compensation is
reasonable in relation to the nature and quality of services performed. Any
changes in the Company's investment and operating policies are required to be
approved by the Board of Directors, including a majority of the Unaffiliated
Directors. See "Risk Factors--Conflicts of Interest Between the Company and
the Manager and Its Affiliates" and "--Control by the Company's Board of
Directors of the Company's Operating Policies and Investment Strategies."

The Company, on the one hand, and the Manager and its Affiliates, on the
other, do not presently expect to, but may in the future, enter into a number
of relationships other than those governed by the Management Agreement, some
of which may give rise to conflicts of interest between the Manager and its
Affiliates and the Company. The market in which the Company will seek to
purchase Mortgage Assets is characterized by rapid evolution of products and
services and, thus, there may in the future be relationships between the
Company and the Manager and its Affiliates in addition to those described
herein. Any such relationships or transactions will require the approval of
the Company's Board of Directors, including a majority of the Unaffiliated
Directors. See "Risk Factors--Conflicts of Interest Between the Company and
the Manager and Its Affiliates."

Pursuant to the terms of the Management Agreement, the Manager and its
Affiliates will agree on the allocation of Mortgage Securities between the
Company and other accounts over which the Manager and its
Affiliates have control. Pursuant to such allocation, the Manager will base
allocation decisions on the procedures the Manager considers fair and
equitable, including, without limitation, such considerations as investment
objectives, restrictions and time horizon, availability of cash and the amount
of existing holdings.

56
<PAGE>

As of the date of this Prospectus, the Company's 100 shares of Common Stock
outstanding are held by TAMCO, an Affiliate of the Manager and TCW. The shares
of Common Stock were issued for $1,500 cash in the aggregate. TAMCO has
represented to the Company that the shares of Common Stock were purchased for
investment purposes only and undertaken that they will be sold only pursuant
to a registration statement under the Securities Act, or an applicable
exemption from the registration requirements thereof. TCW may be deemed to
control the Company prior to the closing of the Offering.

An affiliate of TCW and directors, officers and employees of the Company,
TCW and its Affiliates are expected to purchase 566,667 shares of Common Stock
at the closing of the Offering at a price equal to the initial public offering
price including the 500,000 shares of Common Stock reserved by the U.S.
Underwriters for sale to certain such persons and entities. This will result
in an affiliate of TCW and directors, officers and employees of the Company,
TCW and its Affiliates owning 566,767 shares of Common Stock, or up to
approximately 8.5% of the total shares offered hereby, exclusive of the
Underwriters' over-allotment options. The foregoing parties have agreed not to
sell any shares of Common Stock or any rights to acquire Common Stock for at
least 180 days after the Company's initial public offering of shares of Common
Stock without the consent of Merrill Lynch & Co., but may dispose of the
shares of Common Stock any time thereafter. See "Underwriting." The Manager
and its employees and the Unaffiliated Directors may also receive stock
options pursuant to the Company's 1997 Stock Option Plan. See "Management of
the Company--Stock Options."

TCW Brokerage Services, an Affiliate of the Manager and TCW, will act as a
dealer in connection with the Offering and will receive compensation from the
Underwriters for the shares of Common Stock sold by it. TCW Brokerage Services
has not participated in any negotiations of the Underwriters' compensation or
the terms of the Offering.

LIMITS OF RESPONSIBILITY

Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to undertake the services called for thereunder and
will not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager,
its directors and its officers will not be liable to the Company, any issuer
of Mortgage Securities, any subsidiary of the Company, the Unaffiliated
Directors, the Company's stockholders or any subsidiary's stockholders for
acts performed in accordance with and pursuant to the Management Agreement,
except by reason of acts constituting bad faith, willful misconduct, gross
negligence or reckless disregard of their duties under the Management
Agreement. The Manager does not have significant assets and may not have
significant assets in the future. Consequently, there can be no assurance that
the Company would be able to recover any damages for claims it may have
against the Manager.

The Company has agreed to indemnify the Manager, its directors and its
officers with respect to all expenses, losses, damages, liabilities, demands,
charges and claims arising from any acts or omissions of the Manager made in
good faith in the performance of its duties under the Management Agreement.
The Management Agreement does not limit or restrict the right of the Manager
or any of its officers, directors, employees or Affiliates from engaging in
any business or rendering services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing Mortgage Assets that
meet the Company's policies and criteria. Notwithstanding the foregoing,
members of the MBS Group of the TCW Group, or any equivalent or successor
group of the TCW Group, during their employment by the TCW Group will not
provide any active management services to a residential mortgage REIT, other
than the Company, that invests primarily in high quality Mortgage Securities
comparable to the Mortgage Securities in which the Company will invest. The
Manager may also advise or manage other mortgage-related entities, including
REITs, that invest in residential and commercial mortgages and other
residential and non-residential mortgage securities. The ability of the
Manager and its officers and employees to engage in other business activities
could reduce the time and effort spent on the Company. The Management
Agreement does not specify a minimum amount of time or attention that the
Manager or its officers or employees must devote to the Company's business.
See "Risk Factors--Conflicts of Interest Between the Company and the Manager
and Its Affiliates--Conflicts Relating to the Manager Rendering Services to
Others."

57
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of October 30, 1997,
relating to the beneficial ownership of the Company's Common Stock by (i) all
persons known by the Company to beneficially own more than 5% of the
outstanding shares of the Company's Common Stock, and (ii) all officers and
directors of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED OWNED
------------------------ -----------------
NAME AND ADDRESS OF BEFORE AFTER BEFORE AFTER
BENEFICIAL OWNER(1)(2) OFFERING OFFERING OFFERING OFFERING
---------------------- ---------- ------------- -------- --------
<S> <C> <C> <C> <C>
TCW Asset Management Company
(3)............................ 100 shares 100 shares 100% *
Officers and Directors as a
group (10 persons)............. -- 66,667 shares -- 1.0%(4)
</TABLE>
- --------
*Less than 1%.

(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares of
Common Stock owned by them.

(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of warrants or options. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
which are exercisable within 60 days from the date of this Prospectus have
been exercised. None of the outstanding options to acquire Common Stock of
the Company are exercisable within 60 days of this Prospectus.

(3) Address is: 865 South Figueroa Street, Suite 1800, Los Angeles, California
90017.

(4) Reflects shares to be purchased in the Offering at the initial public
offering price.

58
<PAGE>

FEDERAL INCOME TAX CONSEQUENCES

THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES THAT MAY BE RELEVANT TO A PROSPECTIVE HOLDER OF SHARES OF COMMON
STOCK OF THE COMPANY. THIS DISCUSSION IS BASED ON CURRENT LAW. THE FOLLOWING
DISCUSSION IS NOT EXHAUSTIVE OF ALL POSSIBLE TAX CONSIDERATIONS. IT DOES NOT
GIVE A DETAILED DISCUSSION OF ANY STATE, LOCAL OR FOREIGN TAX CONSIDERATIONS,
NOR DOES IT DISCUSS ALL OF THE ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE
RELEVANT TO A PROSPECTIVE STOCKHOLDER IN LIGHT OF SUCH STOCKHOLDER'S
PARTICULAR CIRCUMSTANCES OR TO CERTAIN TYPES OF STOCKHOLDERS (INCLUDING
INSURANCE COMPANIES, CERTAIN TAX-EXEMPT ENTITIES, FINANCIAL INSTITUTIONS,
BROKER/DEALERS, FOREIGN CORPORATIONS AND PERSONS WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES) SUBJECT TO SPECIAL TREATMENT UNDER FEDERAL
INCOME TAX LAWS.

EACH PROSPECTIVE PURCHASER OF COMMON STOCK OF THE COMPANY IS URGED TO
CONSULT WITH HIS OWN TAX ADVISOR REGARDING THE SPECIFIC CONSEQUENCES TO HIM OF
THE PURCHASE, OWNERSHIP AND SALE OF STOCK IN AN ENTITY ELECTING TO BE TAXED AS
A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSIDERATIONS OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND THE
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.

GENERAL

The Code provides special tax treatment for organizations that qualify and
elect to be taxed as REITs. The discussion below summarizes the material
provisions applicable to the Company as a REIT for federal income tax purposes
and to its stockholders in connection with their ownership of shares of Common
Stock. However, it is impractical to set forth in this Prospectus all aspects
of federal, state, local and foreign tax law that may have tax consequences
with respect to an investor's purchase of the Common Stock. The discussion of
various aspects of federal taxation contained herein is based on the Code,
administrative regulations, judicial decisions, administrative rulings and
practice, all of which are subject to change. In brief, if certain detailed
conditions imposed by the Code are met, entities that invest primarily in real
estate assets, including Mortgage Loans, and that otherwise would be taxed as
corporations are, with certain limited exceptions, not taxed at the corporate
level on their taxable income that is currently distributed to their
stockholders. This treatment eliminates most of the "double taxation" (at the
corporate level and then again at the stockholder level when the income is
distributed) that typically results from the use of corporate investment
vehicles. A qualifying REIT, however, may be subject to certain excise and
other taxes, as well as normal corporate tax, on Taxable Income that is not
currently distributed to its stockholders. See "--Taxation of the Company"
below.

The Company plans to make an election to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1997.

OPINION OF SPECIAL COUNSEL

O'Melveny & Myers LLP, special tax counsel ("Counsel") to the Company, has
advised the Company in connection with the Offering of the Common Stock and
its election to be taxed as a REIT. Based on existing law and certain
representations made to Counsel by the Company, including (without limitation)
that this Prospectus accurately reflects the proposed method of operation of
the Company, and assuming that the Company operates in the manner described in
this Prospectus, in the opinion of Counsel, commencing with the Company's
taxable year ending December 31, 1997, the Company has been organized in
conformity with the requirements for qualification as a REIT under the Code
and the Company's actual and proposed method of operation described in this
Prospectus and as represented by the Company to Counsel will enable the
Company to qualify as a REIT. However, whether the Company will in fact so
qualify will depend on actual operating

59
<PAGE>

results and compliance with the various tests for qualification as a REIT
relating to its income, assets, distributions, ownership and certain
administrative matters, the results of which may not be reviewed by Counsel.
Moreover, certain aspects of the Company's method of operations have not been
considered by the courts or the Service. There can be no assurance that the
courts or the Service will agree with this opinion. In addition, qualification
as a REIT depends on future transactions and events that cannot be known at
this time. Accordingly, Counsel is unable to opine whether the Company will in
fact qualify as a REIT under the Code in all events. In the opinion of
Counsel, the section of the Prospectus entitled "Federal Income Tax
Consequences" identifies and fairly summarizes the federal income tax
considerations that are likely to be material to a holder of the Common Stock
and to the extent such summaries involve matters of law, such statements of
law are correct under the Code. Counsel's opinions are based on various
assumptions and on the factual representations of the Company concerning its
business and assets. Accordingly, no assurance can be given that the actual
results of the Company's operation for any one taxable year will satisfy such
requirements. See "--Termination or Revocation of REIT Status" below.

The opinions of Counsel are based upon existing law including the Internal
Revenue Code of 1986, as amended, existing Treasury Regulations, Revenue
Rulings, Revenue Procedures and case law, all of which is subject to change
either prospectively or retroactively. Moreover, relevant laws or other legal
authorities may change in a manner that could adversely affect the Company or
its stockholders. Counsel's opinions also are based in part on the opinion of
special Maryland counsel, Ballard Spahr Andrews & Ingersoll, that the Company
is duly organized and existing under Maryland law.

In the event that the Company does not qualify as a REIT in any year, it
will be subject to federal income tax as a domestic corporation and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. To the extent that the Company would, as a consequence, be
subject to potentially significant tax liabilities, the amount of earnings and
cash available for distribution to its stockholders would be reduced. See "--
Termination or Revocation of REIT Status" below.

REQUIREMENTS FOR QUALIFICATION AS A REIT

To qualify for tax treatment as a REIT under the Code, the Company must meet
certain tests which are described immediately below.

Stock Ownership Tests. For all taxable years after the first taxable year
for which a REIT election is made, the Company's shares of Common Stock must
be transferable and must be held by a minimum of 100 persons for at least 335
days of a 12 month year (or a proportionate part of a short tax year). The
Company must also use the calendar year as its taxable year. In addition, at
all times during the second half of each taxable year, no more than 50% in
value of the shares of any class of the stock of the Company may be owned
directly or indirectly by five or fewer individuals. If, for any taxable year,
the Company complies with regulations requiring the maintenance of records to
ascertain ownership of its outstanding stock and the Company does not know or
have reason to know that it failed to satisfy this test, it will be treated as
satisfying this test for any such taxable year. In determining whether the
Company's shares are held by five or fewer individuals, the attribution rules
of Sections 544 of the Code apply. For a description of these attribution
rules, see "Description of Capital Stock." The Company's Charter imposes
certain repurchase provisions and transfer restrictions to avoid more than
50% by value of any class of the Company's stock being held by five or fewer
individuals (directly or constructively) at any time during the last half of
any taxable year. Such repurchase and transfer restrictions will not adversely
affect the status of the shares of stock as "transferable shares" for purposes
of qualification as a REIT. The Company intends to satisfy both the 100
stockholder and 50%/5 stockholder individual ownership limitations described
above for as long as it seeks qualification as a REIT. See "Description of
Capital Stock." The Company uses the calendar year as its taxable year for
income tax purposes.

Asset Tests. On the last day of each calendar quarter at least 75% of the
value of the Company's assets must consist of Qualified REIT Real Estate
Assets, government securities, cash and cash items (the "75% of Assets Test").
The Company expects that substantially all of its assets will be Qualified
REIT Real Estate Assets.

60
<PAGE>

Qualified REIT Real Estate Assets include Pass-Through Certificates, interests
in real property, interests in Mortgage Loans secured by real property and
interests in REMICs.

On the last day of each calendar quarter, of the investments in securities
not included in the 75% of Assets Test, the value of any one issuer's
securities may not exceed 5% by value of the Company's total assets and the
Company may not own more than 10% of any one issuer's outstanding voting
securities. Hedging contracts (other than those which are Qualified REIT Real
Estate Assets), and certain types of other Mortgage Assets may be treated as
securities of the entity issuing such agreements or interests. The Company
will take measures to prevent the value of such contracts, interests or assets
issued by any one entity from exceeding 5% of the value of the Company's
assets as of the end of each calendar quarter. Moreover, pursuant to its
compliance guidelines, the Company intends to monitor closely (on not less
than a quarterly basis) the purchase and holding of the Company's assets in
order to comply with the above assets tests. In particular, as of the end of
each calendar quarter the Company intends to limit and diversify its ownership
of hedging contracts and other Mortgage Securities that do not constitute
Qualified REIT Real Estate Assets to less than 25%, in the aggregate, by value
of its portfolio, to less than 5% by value as to any single issuer, and to
less than 10% of the voting stock of any single issuer (collectively the "25%
of Assets Test"). If such limits are ever exceeded, the Company intends to
take appropriate remedial action to dispose of such excess assets within the
30-day period after the end of the calendar quarter, as permitted under the
Code.

When purchasing Mortgage Securities, the Company may rely on opinions of
counsel for the issuer or sponsor of such securities given in connection with
the offering of such securities, or statements made in related offering
documents, for purposes of determining whether and to what extent those
securities (and the income therefrom) constitute Qualified REIT Real Estate
Assets (and income) for purposes of the 75% of Assets Test (and the source of
income tests discussed below). If the Company invests in a partnership for
purposes of the asset tests and the gross income tests, it will be treated as
receiving its share of the income and loss of the partnership and owning a
proportionate share of the assets of the partnership and any income from the
partnership will retain the character that it had in the hands of the
partnership. If the Company forms a taxable affiliate to conduct mortgage
origination and other activities, it will obtain an opinion of counsel that
the proposed organization and ownership of an interest in the taxable
affiliate will not adversely affect the Company's status as a REIT.

Where a failure to satisfy any of the asset tests discussed above results
from an acquisition of securities or other property during a quarter, the
failure can be cured by disposition of sufficient non- qualifying assets
within 30 days after the close of such quarter. The Company intends to
maintain adequate records of the value of its assets to determine its
compliance with the asset tests, and intends to take such action as may be
required to cure any failure to satisfy the test within 30 days after the
close of any quarter.

Gross Income Tests. The Company must meet two separate income-based tests
for each year in order to qualify as a REIT.

1. The 75% Test. At least 75% of the Company's gross income (the "75% of
Income Test") for the taxable year must be derived from the following sources:
(i) rents from real property; (ii) interest (other than interest based in
whole or in part on the income or profits of any person) on obligations
secured by mortgages on real property or on interests in real property; (iii)
gains from the sale or other disposition of interests in real property and
real estate mortgages other than gain from stock in trade, inventory or
property held primarily for sale to customers in the ordinary course of the
Company's trade or business ("Dealer Property"); (iv) dividends or other
distributions on shares in other REITs and, provided such shares are not
Dealer Property, gain from the sale of such shares; (v) abatements and refunds
of real property taxes; (vi) income from the operation, and gain from the
sale, of property acquired at or in lieu of a foreclosure of the mortgage
secured by such property or as a result of a default under a lease of such
property ("Foreclosure Property"); (vii) income received as consideration for
entering into agreements to make loans secured by real property or to purchase
or lease real property (including interests in real property and interests in
mortgages on real property) (for example, commitment fees); and (viii) income
attributable to stock or debt instruments acquired with the proceeds from

61
<PAGE>

the sale of stock or certain debt obligations ("New Capital") of the Company
received during the one-year period beginning on the day such proceeds were
received ("Qualified Temporary Investment Income"). The investments that the
Company intends to make (as described under "Business and Strategy--
Description of Mortgage Assets") will give rise primarily to mortgage interest
qualifying under the 75% of Income Test.

2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least an additional 20% of the Company's gross income
for the taxable year must be derived from those sources, or from dividends,
interest or gains from the sale or disposition of stock or other securities
that are not Dealer Property (the "95% of Income Test"). Income attributable
to Mortgage Warehouse Participations, Mortgage Securities (other than
Qualified REIT Real Estate Assets) that the Company holds directly, dividends
on stock interest on any other obligations not secured by real property, and
gains from the sale or disposition of stock or other securities that are not
Qualified REIT Real Estate Assets will constitute qualified income for
purposes of the 95% of Income Test only, but will not be qualified income for
purposes of the 75% of Income Test. Income from mortgage servicing contracts,
loan guarantee fees (or other contracts under which the Company would earn
fees for performing services) and hedging (other than from Qualified REIT Real
Estate Assets) will not qualify for either the 95% or 75% of Income Tests. The
Company intends to severely limit its acquisition of any assets or investments
the income from which does not qualify for purposes of the 95% of Income Test.
Moreover, in order to help ensure compliance with the 95% of Income Test and
the 75% of Income Test, the Company intends to limit substantially all of the
assets that it acquires to Qualified REIT Real Estate Assets. The policy of
the Company to maintain REIT status may limit the type of assets, including
hedging contracts, that the Company otherwise might acquire.

For purposes of determining whether the Company complies with the 75% of
Income Test and the 95% of Income Test detailed above, gross income does not
include gross income from Prohibited Transactions. A "Prohibited Transaction"
is one involving a sale of Dealer Property, other than Foreclosure Property.
Net income from Prohibited Transactions is subject to a 100% tax. See "--
Taxation of the Company" below.

The Company intends to maintain its REIT status by carefully monitoring its
income, including income from hedging transactions, futures contracts and
sales of Mortgage Assets to comply with the 75% of Income Test and the 95% of
Income Test. See "--Taxation of the Company" below for a discussion of the
potential tax cost of the Company's selling certain Mortgage Securities on a
regular basis. In order to help insure its compliance with the REIT Provisions
of the Code, the Company will adopt guidelines the effect of which will be to
limit its ability to earn certain types of income, including income from
hedging, other than hedging income from Qualified REIT Real Estate Assets. See
"Business and Strategy--Asset/Liability Management--Interest Rate Risk
Management Policy." If the Company fails to satisfy one or both of the 75% or
95% of Income Tests for any year, it may face either (a) assuming such failure
was for reasonable cause and not willful neglect, a 100% tax on the greater of
the amounts of income by which it failed to comply with the 75% of Income Test
or the 95% of Income Test, reduced by estimated related expenses or (b) loss
of REIT status. There can be no assurance that the Company will always be able
to maintain compliance with the gross income tests for REIT qualification
despite its periodic monitoring procedures. Moreover, there is no assurance
that the relief provisions for a failure to satisfy either the 95% or the 75%
of Income Tests will be available in any particular circumstance.

Distribution Requirement. The Company must distribute to its stockholders on
a pro rata basis each year an amount equal to (i) 95% of its Taxable Income
before deduction of dividends paid and excluding net capital gain, plus (ii)
95% of the excess of the net income from Foreclosure Property over the tax
imposed on such income by the Code, less (iii) any "excess noncash income"
(the "95% Distribution Test"). See "Dividend Policy and Distributions." The
Company intends to make distributions to its stockholders in amounts
sufficient to meet this 95% distribution requirement. Such distributions must
be made in the taxable year to which they relate or, if declared before the
timely filing of the Company's tax return for such year and paid not later
than the first regular dividend payment after such declaration, in the
following taxable year. A nondeductible excise tax, equal to 4% of the excess
of such required distributions over the amounts actually distributed will be
imposed on the Company for each calendar year to the extent that dividends
paid during the year (or declared during the last quarter of the year and paid
during January of the succeeding year) are less than the sum of

62
<PAGE>

(i) 85% of the Company's "ordinary income," (ii) 95% of the Company's capital
gain net income, and (iii) income not distributed in earlier years.

If the Company fails to meet the 95% Distribution Test as a result of an
adjustment to the Company's tax returns by the Service, the Company by
following certain requirements set forth in the Code, may pay a deficiency
dividend within a specified period that will be permitted as a deduction in
the taxable year to which the adjustment is made. The Company would be liable
for interest based on the amount of the deficiency dividend. A deficiency
dividend is not permitted if the deficiency is due to fraud with intent to
evade tax or to a willful failure to file timely tax return.

Recordkeeping Requirements. A REIT is required to maintain records regarding
the actual and constructive ownership of its shares, and other information,
and within 30 days after the end of its taxable year, to demand statements
from persons owning above a specified level of the REIT's shares (e.g., if the
Company has over 200 but fewer than 2,000 stockholders of record, from persons
holding 1% or more of the Company's outstanding shares of stock and if the
Company has 200 or fewer stockholders of record, from persons holding 1/2% or
more of the stock) regarding their ownership of shares. The Company must
maintain, as part of its records, a list of those persons failing or refusing
to comply with this demand. Stockholders who fail or refuse to comply with the
demand must submit a statement with their tax returns setting forth the actual
stock ownership and other information. The Company also is required to
maintain permanent records of its assets as of the last day of each calendar
quarter. The Company intends to maintain the records and demand statements as
required by these regulations.

TERMINATION OR REVOCATION OF REIT STATUS

The Company's election to be treated as a REIT will be terminated
automatically if it fails to meet the requirements described above. In that
event, the Company will not be eligible again to elect REIT status until the
fifth taxable year that begins after the year for which its election was
terminated unless all of the following relief provisions apply: (i) the
Company did not willfully fail to file a timely return with respect to the
termination taxable year; (ii) inclusion of incorrect information in such
return was not due to fraud with intent to evade tax; and (iii) the Company
establishes that failure to meet requirements was due to reasonable cause and
not willful neglect. The Company may also voluntarily revoke its election,
although it has no intention of doing so, in which event it will be
prohibited, without exception, from electing REIT status for the year to which
the revocation relates and the following four taxable years.

If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders of the Company with
respect to any year in which it fails to qualify as a REIT would not be
deductible by the Company nor would they be required to be made. Failure to
qualify as a REIT would result in the Company's reduction of its distributions
to stockholders in order to pay the resulting taxes. If, after forfeiting REIT
status, the Company later qualifies and elects to be taxed as a REIT again,
the Company could face significant adverse tax consequences.

TAXATION OF THE COMPANY

In any year in which the Company qualifies as a REIT, it generally will not
be subject to federal income tax on that portion of its Taxable Income or net
capital gain which is distributed to its stockholders. The Company will,
however, be subject to tax at normal corporate rates upon any Net Income or
net capital gain not distributed. The Company intends to distribute
substantially all of its Taxable Income to its stockholders on a pro rata
basis in each year. See "Dividend and Distribution Policy."

In addition, the Company will also be subject to a tax of 100% of net income
from any prohibited transaction and will be subject to a 100% tax on the
greater of the amount by which it fails either the 75% or 95% of Income Tests,
reduced by approximated expenses, if the failure to satisfy such tests is due
to reasonable

63
<PAGE>

cause and not willful neglect and if certain other requirements are met. The
Company may be subject to the alternative minimum tax on certain items of tax
preference.

If the Company acquires any real property as a result of foreclosure, or by
a deed in lieu of foreclosure, it may elect to treat such real properly as
Foreclosure Property. Net income from the sale of Foreclosure Property is
taxable at the maximum federal corporate rate, currently 35%. Income from
Foreclosure Property will not be subject to the 100% tax on prohibited
transactions. The Company will determine whether to treat such real property
as Foreclosure Property on the tax return for the fiscal year in which such
property is acquired.

The Company may securitize Mortgage Loans and sell such Mortgage Securities
through a taxable subsidiary. However, if the Company itself were to sell such
Mortgage Securities on a regular basis, there is a substantial risk that they
would be deemed Dealer Property and that all of the profits from such sales
would be subject to tax at the rate of 100% as income from Prohibited
Transactions. The Company therefore, intends to make any such sales through a
taxable subsidiary. The taxable subsidiary will form mortgage pools and create
mortgage-backed securities. See "--Taxable Subsidiaries" below. The taxable
subsidiary will not be subject to this 100% tax on income from Prohibited
Transactions, which is only applicable to REITs.

The Company may elect to retain and pay income tax on all or a portion of
its net long-term capital gains for any taxable year, in which case the
Company's stockholders would include in their income as long-term capital
gains their proportionate share of such undistributed capital gains. The
stockholders would be treated as having paid their proportionate share of the
capital gains tax paid by the Company, which amounts would be credited or
refunded to the stockholders.

The Company will also be subject to a nondeductible 4% excise tax if it
fails to make timely dividend distributions for each calendar year. See "--
Requirements for Qualification as a REIT--Distribution Requirement" above. The
Company intends to declare its fourth regular annual dividend during the final
quarter of the year and to make such dividend distribution no later than 31
days after the end of the year in order to avoid imposition of the excise tax.
Such a distribution would be taxed to the stockholders in the year that the
distribution was declared, not in the year paid. Imposition of the excise tax
on the Company would reduce the amount of cash available for distribution to
its stockholders.

TAXABLE SUBSIDIARIES

The Company may, in the future, cause the creation and sale of Mortgage
Securities through a taxable corporation. The Company and one or more persons
or entities will own all of the capital stock of that taxable corporation,
sometimes referred to as a "taxable subsidiary." In order to ensure that the
Company will not violate the prohibition on ownership of more than 10% of the
voting stock of a single issuer and the prohibition on investing more than 5%
of the value of its assets in the stock or securities of a single issuer, the
Company will own only shares of nonvoting preferred stock of that taxable
subsidiary corporation and will not own any of the taxable subsidiary's common
stock. The Company will monitor the value of its investment in the taxable
subsidiary on a quarterly basis to limit the risk of violating any of the
tests that comprise the 25% of Assets Test. In addition, the dividends that
the taxable subsidiary pays to the Company will not qualify as income from
Qualified REIT Real Estate Assets for purposes of the 75% of Income Test, and
in all events would have to be limited, along with the Company's other
interest, dividends, gains on the sale of securities, hedging income, and
other income not derived from Qualified REIT Real Estate Assets to less than
25% of the Company's gross revenues in each year. The taxable subsidiary will
not elect REIT status, will be subject to income taxation on its net earnings
and will generally be able to distribute only its net after-tax earnings to
its stockholders, including the Company, as dividend distributions. If the
taxable subsidiary creates a taxable mortgage pool, such pool itself will
constitute a separate taxable subsidiary of the taxable subsidiary. The
taxable subsidiary would be unable to offset the income derived from such a
taxable mortgage pool with losses derived from any other activities.

64
<PAGE>

TAXATION OF STOCKHOLDERS

For any taxable year in which the Company is treated as a REIT for federal
income purposes, amounts distributed by the Company to its stockholders out of
current or accumulated earnings and profits will be includable by the
stockholders as ordinary income for federal income tax purposes unless
properly designated by it as capital gain dividends. In the latter case, the
distributions will be taxable to the stockholders as long-term capital gains.

Distributions of the Company will not be eligible for the dividends received
deduction for corporations. Stockholders may not deduct any net operating
losses or capital losses of the Company.

Any loss on the sale or exchange of shares of the Common Stock held by a
stockholder for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividend received on the Common Stock held
by such stockholders.

If the Company makes distributions to its stockholders in excess of its
current and accumulated earnings and profits, those distributions will be
considered first a tax-free return of capital, reducing the tax basis of a
stockholder's shares until the tax basis is zero. Such distributions in excess
of the tax basis will be taxable as gain realized from the sale of the
Company's stock.

The Company does not expect to acquire Residual interests issued by REMICs.
Such Residual interests, if acquired by a REIT, may generate excess inclusion
income. Excess inclusion income cannot be offset by net operating losses of a
stockholder. If the stockholder is a Tax-Exempt Entity, the excess inclusion
income is fully taxable as UBTI. If allocated to a foreign stockholder, the
excess inclusion income is subject to federal income tax withholding without
reduction pursuant to any otherwise applicable tax treaty. Potential
investors, and in particular Tax-Exempt Entities, are urged to consult with
their tax advisors concerning this issue.

The Company intends to finance the acquisition of Mortgage Assets by
entering into reverse repurchase agreements, which are essentially loans
secured by the Company's Mortgage Assets. The Company will seek to enter into
master repurchase agreements with secured lenders known as "counter-parties."
Typically, such master repurchase agreements have cross-collateralization
provisions that afford the counter-party the right to foreclose on the
Mortgage Assets pledged as collateral. If the Service were to successfully
take the position that the cross-collateralization provisions of the master
repurchase agreements result in the Company having issued debt instruments
(the reverse repurchase agreements) with differing maturity dates secured by a
pool of Mortgage Loans, a portion of its income could be characterized as
"excess inclusion income." See "Risk Factors--Adverse Tax Treatment of Excess
Inclusion Income."

The Company will notify stockholders after the close of the Company's
taxable year as to the portions of the distributions which constitute ordinary
income, return of capital and capital gain. Dividends and distributions
declared in the last quarter of any year payable to stockholders of record on
a specified date in such month will be deemed to have been received by the
stockholders and paid by the Company on December 31 of the record year,
provided that such dividends are paid before February 1 of the following year.

TAXATION OF TAX-EXEMPT ENTITIES

In general, a Tax-Exempt Entity that is a stockholder of the Company is not
subject to tax on distributions. The Service has ruled that amounts
distributed by a REIT to an exempt employees' pension trust do not constitute
UBTI and thus should be nontaxable to such a Tax-Exempt Entity. Based on that
ruling, but subject to the discussion of excess inclusion income set forth
under "--Taxation of Stockholders" above, indebtedness incurred by the Company
in connection with the acquisition of real estate assets such as Mortgage
Loans will not cause dividends of the Company paid to a stockholder that is a
Tax-Exempt Entity to be UBTI. However, if a Tax-Exempt Entity has financed the
acquisition of any of its stock in the Company with "acquisition indebtedness"
within the meaning of the Code, distributions on such stock could be treated
as UBTI. Under certain conditions, if a tax-exempt employee pension or profit
sharing trust were to acquire more than 10% of the Company's stock, a portion
of the dividends on such stock could be treated as UBTI.

65
<PAGE>

For 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 Company will
constitute UBTI unless the organization is able to properly deduct amounts set
aside or placed in reserve for certain purposes so as to offset the UBTI
generated by its investment in the Company. Such entities should review Code
Section 512(a)(3) and should consult their own tax advisors concerning these
"set aside" and reserve requirements.

STATE AND LOCAL TAXES

The Company and its stockholders may be subject to state or local taxation
in various jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of the Company and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Common Stock.

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO FOREIGN
HOLDERS

The following discussion summarizes certain United States tax consequences
of the acquisition, ownership and disposition of the Common Stock by an
initial purchaser of the Common Stock that, for United States income tax
purposes, is not a "United States person" (a "Foreign Holder"). For purposes
of discussion, a "United States person" means: a citizen or resident of the
United States; a corporation, partnership, or other entity created or
organized in the United States or under the laws of the United States or of
any political subdivision thereof (unless, in the case of a partnership, the
Service provides otherwise by regulations); an estate whose income is
includable in gross income for United States income tax purposes regardless of
its source; or, a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. This discussion does not consider any specific facts
or circumstances that may apply to a particular Foreign Holder. Prospective
investors are urged to consult their tax advisors regarding the United States
tax consequences of acquiring, holding and disposing of Common Stock, as well
as any tax consequences that may arise under the laws of any foreign, state,
local or other taxing jurisdiction.

Dividends. Dividends paid by the Company out of earnings and profits, as
determined for United States income tax purposes, to a Foreign Holder will
generally be subject to withholding of United States federal income tax at the
rate of 30%, unless reduced or eliminated by an applicable tax treaty or
unless such dividends are treated as effectively connected with a United
States trade or business conducted by the Foreign Holder. A Foreign Holder
eligible for a reduction in withholding under an applicable treaty must so
notify the Company by completing the appropriate IRS form. Distributions paid
by the Company in excess of its earnings and profits will be treated as a tax-
free return of capital to the extent of the holder's adjusted basis in his
Common Stock, and thereafter as gain from the sale or exchange of a capital
asset as described below. If it cannot be determined at the time a
distribution is made whether such distribution will exceed the Company's
earnings and profits (which, under most circumstances, will correspond to the
Company's Net Income before the deduction for dividends paid), the
distribution will be subject to withholding at the same rate as dividends.
Amounts so withheld, however, will be refundable or creditable against the
Foreign Holder's United States tax liability if the Company subsequently
determines that such distribution was, in fact, in excess of the earnings and
profits of the Company. If the receipt of the dividend is treated as being
effectively connected with the conduct of a trade or business within the
United States by a Foreign Holder, the dividend received by such holder will
be subject to the United States federal income tax on net income that applies
to United States persons generally (and, in addition with respect to foreign
corporate holders and under certain circumstances, the 30% branch profits
tax).

For any year in which the Company qualifies as a REIT, distributions to a
Foreign Holder that are attributable to gain from the sales or exchanges by
the Company of "United States real property interests" will be treated as if
such gain were effectively connected with a United States business and will
thus be subject to tax at the normal capital gain rates applicable to United
States stockholders (subject to applicable alternative

66
<PAGE>

minimum tax) under the provisions of the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"). Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder not entitled to a treaty exemption. The Company is required to
withhold 35% of any distribution that could be designated by the Company as a
capital gains dividend. This amount may be credited against the Foreign
Holder's FIRPTA tax liability.

Gain on Disposition. A Foreign Holder will generally not be subject to
United States federal income tax on gain recognized on a sale or other
disposition of the Common Stock unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States by the
Foreign Holder, (ii) in the case of a Foreign Holder who is a nonresident
alien individual and holds the Common Stock as a capital asset, such holder is
present in the United States for 183 or more days (computed in part by
reference to days present in the 2 prior years) in the taxable year and
certain other requirements are met, or (iii) the Foreign Holder is subject to
tax under the FIRPTA rules discussed below. Gain that is effectively connected
with the conduct of a United States Holder will be subject to the United
States federal income tax on net income that applies to United States persons
generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax) but will not be subject to withholding.
Foreign Holders should consult applicable treaties, which may provide for
different rules.

Gain recognized by a Foreign Holder upon a sale of its Common Stock will
generally not be subject to tax under FIRPTA if the Company is a "domestically
controlled REIT," which is defined generally as a REIT in which at all times
during a specified testing period less than 50% in value of its shares were
held directly or indirectly by non-U.S. persons. Because only a minority of
the Company's stockholders are expected to be Foreign Holders, the Company
anticipates that it will qualify as a "domestically controlled REIT."
Accordingly, a Foreign Holder should not be subject to U.S. tax from gains
recognized upon disposition of the Common Stock. However, because the Common
Stock will be publicly traded, no assurance can be given that the Company will
continue to be a "domestically controlled REIT."

Information Reporting and Backup Withholding. Under temporary United States
Treasury regulations, United States information reporting requirements and
backup withholding tax will generally not apply to dividends paid on the
Common Stock to a Foreign Holder at an address outside the United States.
Payments by a United States office of a broker of the proceeds of a sale of
the Common Stock is subject to both backup withholding at a rate of 31% and
information reporting unless the holder certifies its Foreign Holder status
under penalties of perjury or otherwise establishes an exemption. Information
reporting requirements (but not backup withholding) will also apply to
payments of the proceeds of sales of the Common Stock by foreign offices of
United States brokers, or foreign brokers with certain types of relationships
to the United States, unless the broker has documentary evidence in its
records that the holder is a Foreign Holder and certain other conditions are
met, or the holder otherwise establishes an exemption.

Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Foreign
Holder's United States federal income tax liability, provided that the
required information is furnished to the Service.

These information reporting and backup withholding rules are under review by
the United States Treasury and their application to the Common Stock could be
changed by future regulations.

RECENT TAX LEGISLATION

On August 5, 1997, President Clinton signed into law the Taxpayer Relief Act
of 1997 (the "1997 Act"). Effective for taxable years beginning after the date
of the enactment of the 1997 Act, the 1997 Act, among other things, (i)
extends the current two-year period during which property acquired at or in
lieu of foreclosure of the mortgage secured by such property (or as a result
of a default under a lease of such property) may be treated as Foreclosure
Property to the close of the third taxable year following the taxable year
during which such property was acquired, (ii) expands the types of interest
rate hedges that may be treated as Qualified Hedges, and (iii) reduces the
maximum federal long-term capital gains rate applicable to individuals to 20%.

67
<PAGE>

ERISA CONSIDERATIONS

In considering an investment in the Common Stock, a fiduciary of a profit-
sharing, pension stock bonus plan or individual retirement account ("IRA"),
including a plan for self-employed individuals and their employees or any
other employee benefit plan subject to Prohibited Transaction provisions of
the Code or the fiduciary responsibility provisions of ERISA (an "ERISA Plan")
should consider (a) whether the ownership of Common Stock is in accordance
with the documents and instruments governing such ERISA Plan, (b) whether the
ownership of Common Stock is consistent with the fiduciary's responsibilities
and satisfies the requirements of Part 4 of Subtitle B of Title I of ERISA
(where applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (c) ERISA's prohibitions in
improper delegation of control over, or responsibility for, "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates
in, permits (by action or inaction) the occurrence of, or fails to remedy a
known breach of duty by another fiduciary and (d) the need to value the assets
of the ERISA Plan annually.

In regard to the "plan assets" issue noted in clause (c) above, Counsel is
of the opinion that, effective as of the date of the closing of the Offering
and the listing of the shares of Common Stock on the New York Stock Exchange,
and based on certain representations of the Company, the Common Stock should
qualify as a "publicly offered security," and, therefore, the acquisition of
such Common Stock by ERISA Plans should not cause the Company's assets to be
treated as assets of such investing ERISA Plans for purposes of the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
the Code. Fiduciaries of ERISA Plans and IRAs should consult with and rely
upon their own advisors in evaluating the consequences under the fiduciary
provisions of ERISA and the Code of an investment in Common Stock in light of
their own circumstances.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 100 million shares
of Common Stock, par value $.01 per share, and 50 million shares of preferred
stock, par value $.01 per share, issuable in one or more classes. Each share
of Common Stock is entitled to participate equally in dividends when and as
declared by the Board of Directors and in the distribution of assets of the
Company upon liquidation. Each share of Common Stock is entitled to one vote
and will be fully paid and non-assessable by the Company upon issuance. Shares
of the Common Stock of the Company have no preference, conversion, exchange,
preemptive or cumulative voting rights. The authorized capital stock of the
Company may be increased and altered from time to time as permitted by
Maryland law.

The preferred stock may be issued from time to time in one or more classes
or series, with such distinctive designations, rights and preferences as shall
be determined by the Company's Board of Directors. Preferred stock would be
available for possible future financings of, or acquisitions by, the Company
and for general corporate purposes without any legal requirement that further
stockholder authorization for issuance be obtained. The issuance of preferred
stock could have the effect of making an attempt to gain control of the
Company more difficult by means of a merger, tender offer, proxy contest or
otherwise. The preferred stock, if issued, would have a preference on dividend
payments that could affect the ability of the Company to make dividend
distributions to the common stockholders.

The Bylaws provide that meetings of the stockholders of the Company are to
be held annually and special meetings may be called by the Board of Directors,
the Chairman of the Board, the President, a majority of the Unaffiliated
Directors or the stockholders.

REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER

Two of the requirements of qualification for the tax benefits accorded by
the REIT Provisions of the Code are that (1) during the last half of each
taxable year not more than 50% in value of the outstanding shares may be owned
directly or indirectly by five or fewer individuals (the "50%/5 stockholder
test") and (2) there must be at least 100 stockholders on 335 days of each
taxable year of 12 months.

68
<PAGE>

In order that the Company may meet these requirements at all times, the
Charter prohibits any person from acquiring or holding, directly or
indirectly, shares of Common Stock in excess of 9.8% (in value or in number of
shares, whichever is more restrictive) of the aggregate of the outstanding
shares of Common Stock or in excess of 9.8% (in value or in number of shares,
whichever is more restrictive) of the aggregate of the outstanding shares of
preferred stock of the Company. For this purpose, the term "ownership" is
defined in accordance with the REIT Provisions of the Code and the
constructive ownership provisions of Section 544 of the Code, as modified by
Section 856(h)(1)(B) of the Code. Subject to certain limitations, the
Company's Board of Directors may increase or decrease the ownership
limitations or waive the limitations for individual investors.

For purposes of the 50%/5 stockholder test, the constructive ownership
provisions applicable under Section 544 of the Code attribute ownership of
securities owned by a corporation, partnership, estate or trust
proportionately to its stockholders, partners or beneficiaries, attribute
ownership of securities owned by family members and partners to other members
of the same family, treat securities with respect to which a person has an
option to purchase as actually owned by that person, and set forth application
of such attribution provisions (i.e., "reattribution"). Thus, for purposes of
determining whether a person holds shares of Common Stock in violation of the
ownership limitations set forth in the Charter, many types of entities may own
directly more than the 9.8% limit because such entities' shares are attributed
to its individual stockholders. On the other hand, a person will be treated as
owning not only shares of Common Stock actually or beneficially owned, but
also any shares of Common Stock attributed to such person under the
attribution rules described above. Accordingly, under certain circumstances,
shares of Common Stock owned by a person who individually owns less than 9.8%
of the shares outstanding may nevertheless be in violation of the ownership
limitations set forth in the Charter. Ownership of shares of Common Stock
through such attribution is generally referred to as constructive ownership.
The 100 stockholder test is determined by actual, and not constructive,
ownership. The Company will have greater than 100 stockholders of record.

The Charter further provides that if any transfer of shares of Common Stock
which, if effective, would result in any person beneficially or constructively
owning shares of Common Stock in excess or in violation of the above transfer
or ownership limitations, then that number of shares of Common Stock the
beneficial or constructive ownership of which otherwise would cause such
person to violate such limitations (rounded to the nearest whole shares) shall
be automatically transferred to a trustee (the "Trustee") as trustee of a
trust (the "Trust") for the exclusive benefit of one or more charitable
beneficiaries (the "Charitable Beneficiary"), and the intended transferee
shall not acquire any rights in such shares. Shares of Common Stock held by
the Trustee shall be issued and outstanding shares of Common Stock. The
intended transferee shall not benefit economically from ownership of any
shares held in the Trust, shall have no rights to dividends, and shall not
possess any rights to vote or other rights attributable to the shares held in
the Trust. The Trustee shall have all voting rights and rights to dividends or
other distributions with respect to shares held in the Trust, which rights
shall be exercised for the exclusive benefit of the Charitable Beneficiary.
Any dividend or other distribution paid to the intended transferee prior to
the discovery by the Company that shares of Common Stock have been transferred
to the Trustee shall be paid with respect to such shares to the Trustee by the
intended transferee upon demand and any dividend or other distribution
authorized but unpaid shall be paid when due to the Trustee. The Board of
Directors of the Company may, in its discretion, waive these requirements on
owning shares in excess of the ownership limitations.

Within 20 days of receiving notice from the Company that shares of Common
Stock have been transferred to the Trust, the Trustee shall sell the shares
held in the Trust to a person, designated by the Trustee, whose ownership of
the shares will not violate the ownership limitations set forth in the
Charter. Upon such sale, the interest of the Charitable Beneficiary in the
shares sold shall terminate and the Trustee shall distribute the net proceeds
of the sale to the intended transferee and to the Charitable Beneficiary as
follows. The intended transferee shall receive the lesser of (1) the price
paid by the intended transferee for the shares or, if the intended transferee
did not give value for the shares in connection with the event causing the
shares to be held in the Trust (e.g., in the case of a gift, devise or other
such transaction), the Market Price (as defined below) of the shares on the
day of the event causing the shares to be held in the Trust, and (2) the price
per share received by the Trustee from the sale or other disposition of the
shares held in the Trust. Any net sales proceeds in excess of

69
<PAGE>

the amount payable to the intended transferee shall be immediately paid to the
Charitable Beneficiary. In addition, shares of Common Stock transferred to the
Trustee shall be deemed to have been offered for sale to the Company, or its
designee, at a price per share equal to the lesser of (i) the price per share
in the transaction that resulted in such transfer to the Trust (or, in the
case of a devise or gift, the Market Price at the time of such devise or
gift), and (ii) the Market Price on the date the Company, or its designee,
accepts such offer. The Company shall have the right to accept such offer
until the Trustee has sold shares held in the Trust. Upon such a sale to the
Company, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
intended transferee.

The term "Market Price" on any date shall mean, with respect to any class or
series of outstanding shares of the Company's stock, the Closing Price (as
defined below) for such shares on such date. The "Closing Price" on any date
shall mean the last sale price for such shares, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, for such shares, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if such
shares are not listed or admitted to trading on the New York Stock Exchange,
as reported on the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which such shares are listed or admitted to trading or, if such shares are not
listed or admitted to trading on any national securities exchange, the last
quoted price, or, if not so quoted, the average of the high bid and low asked
prices in the over-the- counter market, as reported by the National
Association of Securities Dealers, Inc., Automated Quotation Systems, or, if
such system is no longer in use, the principal other automated quotation
system that may then be in use or, if such shares are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by
a professional market maker making a market in such shares selected by the
Company's Board of Directors or, in the event that no trading price is
available for such shares, the fair market value of the shares, as determined
in good faith by the Company's Board of Directors.

All persons who own, directly or indirectly, more than 5%, in the case of
2,000 or more stockholders of record and 1% in the case of more than 200 but
fewer than 2,000 stockholders of record, of all classes or series of the
Company's stock, within 30 days after the end of each taxable year, are
required to give written notice to the Company stating the name and address of
such direct or indirect owner, the number of shares of each class and series
of stock of the Company directly or indirectly owned and a description of the
manner in which such shares are held. Each such direct or indirect owner shall
provide to the Company such additional information as the Company may request
in order to determine the effect, if any, of such ownership on the Company's
status as a REIT and to ensure compliance with the ownership limitations.

70
<PAGE>

CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS

The following summary of certain provisions of the Maryland General
Corporation Law, as amended from time to time (the "MGCL"), and of the Charter
and the Bylaws of the Company does not purport to be complete and is subject
to and qualified in its entirety by reference to Maryland law and to the
Charter and the Bylaws of the Company, copies of which are filed as exhibits
to the Registration Statement of which this Prospectus is a part. See
"Additional Information." For a description of additional restrictions on
transfer of the Common Stock, see "Description of Capital Stock--Repurchase of
Shares and Restrictions on Transfer."

REMOVAL OF DIRECTORS

The Charter provides that a director may be removed from office at any time
but only by the affirmative vote of the holders of at least two-thirds of the
votes of the shares entitled to be cast in the election of directors.

BUSINESS COMBINATIONS

Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) 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. The MGCL does not apply, however, to business combinations that
are approved or exempted by the board of directors of the corporation prior to
the time that the Interested Stockholder becomes an Interested Stockholder.

CONTROL SHARE ACQUISITIONS

The MGCL provides that "control shares" of a Maryland corporation 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 acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority or (iii) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of control shares, subject
to certain exceptions.

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 the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.

71
<PAGE>

If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders 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 by the acquiror in the
control share acquisition.

The control share acquisition statute does not apply (i) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or (ii) to acquisitions approved or exempted by the charter
or bylaws of the corporation.

The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's shares of Common Stock. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.

INTERESTED PARTY TRANSACTIONS

Pursuant to the Company's Bylaws, the Company will not enter into any
transactions or agreements with any director, officer or Affiliate of the
Company except as approved by a majority of the Company's Board of Directors,
including a majority of the Unaffiliated Directors. The Company has no
restrictions on any director, officer or Affiliate of the Company from
engaging for their own account in business activities of the types conducted
or to be conducted by the Company and its Affiliates.

AMENDMENT TO THE CHARTER

The Company reserves the right from time to time to make any amendment to
its Charter, now or hereafter authorized by law, including any amendment which
alters the contract rights, as expressly set forth in the Charter, of any
shares of outstanding stock. The Charter may be amended only by the
affirmative vote of holders of shares entitled to cast not less than a
majority of all the votes entitled to be cast on the matter; provided,
however, that provisions on removal of directors and certain other provisions
may be amended only by the affirmative vote of holders of shares entitled to
cast not less than two-thirds of all the votes entitled to be cast in the
election of directors.

DURATION OF THE COMPANY

The Company's Charter provides that the Company shall have a perpetual
duration.

DISSOLUTION OF THE COMPANY

The dissolution of the Company must be approved by the affirmative vote of
holders of shares entitled to cast not less than two-thirds of all the votes
entitled to be cast on the matter.

ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS

The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(1) pursuant to the Company's notice of the meeting, (2) by the Board of
Directors or, (3) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws, and
(b) with respect to special meetings of stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders and nominations of persons for election to

72
<PAGE>

the Board of Directors or (c) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder
who is entitled to vote at the meeting and has complied with the advance
notice provisions set forth in the .

POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS

The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Charter on removal of directors and the advance notice
provisions of the could delay, defer or prevent a change in control of the
Company or other transaction that might involve a premium price for holders of
Common Stock or otherwise be in their best interest.

TRANSFER AGENT AND REGISTRAR

The Company intends to appoint The Bank of New York as its transfer agent
and registrar for the Common Stock.

REPORTS TO STOCKHOLDERS

The Company will furnish its stockholders with annual reports containing
audited financial statements and such other periodic reports as it may
determine to furnish or as may be required by law.

73
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "U.S. Underwriters"), and each of the U.S.
Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch & Co."), PaineWebber Incorporated, Stifel, Nicolaus & Company,
Incorporated and Sutro & Co. Incorporated are acting as representatives (the
"U.S. Representatives"), has severally agreed to purchase from the Company the
number of shares of Common Stock set forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith........................... 1,055,000
Incorporated
PaineWebber Incorporated........................................ 1,055,000
Stifel, Nicolaus & Company, Incorporated........................ 1,055,000
Sutro & Co. Incorporated........................................ 1,055,000
BT Alex. Brown Incorporated..................................... 60,000
Bear, Stearns & Co. Inc......................................... 60,000
CIBC Oppenheimer Corp........................................... 60,000
A.G. Edwards & Sons, Inc........................................ 60,000
Furman Selz LLC................................................. 60,000
Lazard Freres & Co. LLC......................................... 60,000
Legg Mason Wood Walker, Incorporated............................ 60,000
Lehman Brothers Inc............................................. 60,000
NationsBanc Montgomery Securities, Inc.......................... 60,000
Prudential Securities Incorporated.............................. 60,000
Smith Barney Inc................................................ 60,000
Advest, Inc..................................................... 30,000
Robert W. Baird & Co. Incorporated.............................. 30,000
Dominick & Dominick, Incorporated............................... 30,000
EVEREN Securities, Inc.......................................... 30,000
Friedman, Billings, Ramsey & Co., Inc........................... 30,000
Gruntal & Co., L.L.C............................................ 30,000
Janney Montgomery Scott Inc..................................... 30,000
Edward D. Jones & Co., L.P...................................... 30,000
McDonald & Company Securities, Inc.............................. 30,000
Principal Financial Securities, Inc............................. 30,000
Rauscher Pierce Refsnes, Inc.................................... 30,000
Raymond James & Associates, Inc................................. 30,000
The Robinson-Humphrey Company, LLC.............................. 30,000
Scott & Stringfellow, Inc....................................... 30,000
Tucker Anthony Incorporated..................................... 30,000
Wheat, First Securities, Inc.................................... 30,000
---------
Total...................................................... 5,360,000
=========
</TABLE>

The Company has also entered into an international purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with Merrill Lynch International,
PaineWebber International (U.K.) Ltd., Stifel, Nicolaus & Company,
Incorporated and Sutro & Co. Incorporated (the "International Managers" and,
together with the U.S. Underwriters, the "Underwriters"). Subject to the terms
and conditions set forth in the International Purchase Agreement, the Company
has agreed to sell to the International Managers, and the International
Managers have severally agreed to purchase, an aggregate of 1,340,000 shares
of Common Stock. The initial public offering price per share and the
underwriting discount per share are identical under the U.S. Purchase
Agreement and the International Purchase Agreement.

74
<PAGE>

In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock being sold pursuant to such Purchase Agreement if any
of the shares of Common Stock are purchased. In the event of a default by one
or more of the Underwriters, the commitments of the non-defaulting U.S.
Underwriters or International Managers, as the case may be, may be increased
or the U.S. Purchase Agreement or the International Purchase Agreement, as the
case may be, may be terminated.

The U.S. Representatives have advised the Company that the U.S. Underwriters
propose to offer the shares of Common Stock offered hereby to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $.63 per share of Common Stock, and that the U.S. Underwriters may
allow, and such dealers may reallow, a discount not in excess of $.10 per
share of Common Stock on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.

The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and the International Managers are permitted
to sell shares of Common Stock to each other for purposes of resale at the
initial public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are non-United
States persons or to persons they believe intend to resell to persons who are
non-United States persons, and the International Managers and any dealer to
whom they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to persons who are United States persons or to persons they
believe intend to resell to persons who are United States persons, except in
each case for transactions pursuant to the Intersyndicate Agreement.

The Company has granted to the U.S. Underwriters an option, exercisable for
30 days after the date hereof, to purchase up to an aggregate of 804,000
additional shares of Common Stock and to the International Managers an option,
exercisable for 30 days after the date hereof, to purchase up to 201,000
additional shares of Common Stock, in each case solely to cover over-
allotments, if any, at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. To the
extent that the U.S. Underwriters exercise their option, each of the U.S.
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the foregoing table is of the
number of shares of Common Stock initially purchased by the U.S. Underwriters.

The Company, the Manager, their respective officers and directors and
certain officers, employees and directors of TCW Group and its Affiliates have
agreed not to offer, sell, agree or offer to sell, grant any option to
purchase or otherwise dispose of, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for shares of Common Stock
directly or indirectly, for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch & Co. acting on
behalf of the Underwriters, except that the Company may, without such consent,
grant options or issue shares of Common Stock pursuant to the Company's 1997
Stock Option Plan.

At the request of the Company, the U.S. Underwriters have reserved up to
500,000 shares of Common Stock for sale (at the initial public offering price)
to an affiliate of TCW and directors, officers and employees of the Company,
TCW and its Affiliates, who have expressed an interest in purchasing such
shares. There is no obligation, however, on the part of any such individuals
or entities to purchase any shares of Common Stock. Each such person has
agreed to the restrictions on transfer of the shares of Common Stock that are
described in the preceding paragraph. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons or entities purchase such reserved shares. Any reserved shares of
Common Stock not so purchased will be offered by the Underwriters to the
general public on the same basis as the other shares of Common Stock offered
hereby. The underwriting discount payable to the U.S. Underwriters for 295,333
shares of Common Stock reserved for sale to the affiliate of TCW will be
reduced by an aggregate amount of $248,080, and the net proceeds to the
Company will be increased by such amount.

75
<PAGE>

The U.S. Representatives and the International Managers have advised the
Company that the Underwriters do not intend to confirm sales to any account
over which they exercise discretionary authority.

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock has been determined by
negotiations between the Company and the Underwriters. Among the factors
considered in such negotiations, in addition to prevailing market conditions,
are the Company's future prospects, the experience of its management, the
economic condition of the financial services industry in general, the demand
for similar securities of companies considered comparable to the Company and
other relevant factors. The initial public offering price set forth on the
cover page of this Prospectus should not, however, be considered an indication
of the actual value of the Common Stock. Such price will be subject to change
as a result of market conditions and other factors. There can be no assurance
that an active trading market will develop for the Common Stock or that the
Common Stock will trade in the public market subsequent to the Offering at or
above the initial public offering price.

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, Merrill Lynch & Co. is permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), Merrill Lynch & Co.
may reduce that short position by purchasing Common Stock in the open market.
Merrill Lynch & Co. may also elect to reduce any short position through the
exercise of all or part of the over-allotment options described above.

Merrill Lynch & Co. may also impose a penalty bid on certain Underwriters
and selling group members. This means that if Merrill Lynch & Co. purchases
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that Merrill Lynch & Co. will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.

The Company and the Manager, subject to certain limitations, have agreed to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof. The Company intends
to purchase insurance that, among other things, provides coverage for the
Company and the Manager with respect to the foregoing indemnification and
contribution agreement. See "The Manager--Expenses."

Certain of the Underwriters have performed, and may continue to perform,
investment banking, broker-dealer and financial advisory services for certain
Affiliates of the Company and have received and will receive customary
compensation therefor.

The Underwriters undertake that the minimum distribution, issuance and
aggregate market value requirements for listing on the New York Stock Exchange
will be achieved in the Offering.

In addition, TCW Brokerage Services, an affiliate of the Manager, will act
as a dealer in connection with the U.S. Offering and receive compensation from
the Underwriters in connection with the shares of Common Stock it sells. See
"Risk Factors--Conflicts of Interest Between the Company and the Manager and
Its Affiliates."

76
<PAGE>

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Melveny & Myers LLP, San Francisco, California, and
certain legal matters will be passed upon for the Underwriters by Brown & Wood
llp, New York, New York. O'Melveny & Myers LLP and Brown & Wood llp, will rely
as to certain matters of Maryland law on the opinion of Ballard Spahr Andrews
& Ingersoll, Baltimore, Maryland. In addition, the description of federal
income tax consequences contained in this Prospectus entitled "Federal Income
Tax Consequences" is based upon the opinion of O'Melveny & Myers LLP.

EXPERTS

The balance sheet of Apex Mortgage Capital, Inc. as of September 15, 1997,
included in this Prospectus has been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and is
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.

ADDITIONAL INFORMATION

Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C., and may be obtained at rates prescribed by the Commission
upon request to the Commission and inspected, without charge, at the offices
of the Commission. The Company will be subject to the informational
requirements of the Exchange Act, and in accordance therewith, will
periodically file reports and other information with the Commission. Such
reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and at 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained from the Commission at prescribed rates through its Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respect by such reference. The Commission maintains a Website that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the site is http://www.sec.gov.

The Company intends to furnish the holders of Common Stock with annual
reports containing financial statements audited by its independent certified
public accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.

77
<PAGE>

GLOSSARY

As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.

"Affiliate" means, when used with reference to a specified person, any
person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with the specified
person.

"Agency Certificates" means GNMA Certificates, Fannie Mae Certificates and
FHLMC Certificates.

"ARM" means either a (i) a Mortgage Security as to which the underlying
mortgage loans feature adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an establish index or (ii) a
Mortgage Loan or any mortgage loan underlying a Mortgage Security that
features adjustments of the underlying interest rate at predetermined times
based on an agreed margin to an established index. An ARM is usually subject
to periodic and lifetime interest rate and/or payment caps.

"ASR" means ASR Investments Corporation.

"Average Net Invested Capital" means for any period (i) the arithmetic
average of the sum of the gross proceeds of the offerings of its equity
securities by the Company, after deducting any underwriting discounts and
commissions and other expenses and costs relating to such offerings, plus (A)
the Company's retained earnings (taking into account any losses incurred) and
(B) any non-cash charges or reserves, including depreciation, mark-to-market
adjustments and unrealized credit loss, computed by taking the average of such
values at the end of each month during such period, plus (ii) any unsecured
debt approved by the Unaffiliated Directors to be included in Average Net
Invested Capital.

"Average Net Worth" means for any period the arithmetic average of the sum
of the gross proceeds from the offerings of its equity securities by the
Company, before deducting any underwriting discounts and commissions and other
expenses and costs relating to the offerings, plus the Company's retained
earnings (without taking into account any losses incurred in prior periods)
computed by taking the average of such values at the end of each month during
such period.

"Bankruptcy Code" means Title 11 of the United States Code, as amended.

"Capital and Leverage Policy" means the policy of the Company that limits
its ability to acquire additional Mortgage Assets during times when the
capital base of the Company is less than a required amount, as described in
this Prospectus.

"Charitable Beneficiary" means a charitable beneficiary of a Trust.

"Charter" means the Company's Articles of Incorporation, as amended.

"Closing Price" on any date shall mean the last sale price for such shares,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, for such shares, in either case
as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if such shares are not listed or admitted to trading on the New
York Stock Exchange, as reported on the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such shares are listed or admitted to trading or,
if such shares are not listed or admitted to trading on any national
securities exchange, the last quoted price, or, if not so quoted, the average
of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation Systems, or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if such shares are not
quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in such
shares selected by the Company's Board of Directors or, in the event that no
trading price is available for such shares, the fair market value of the
shares, as determined in good faith by the Company's Board of Directors.

78
<PAGE>

"CMOs" means debt obligations (bonds) that are collateralized by mortgage
loans or mortgage certificates other than Mortgage Derivative Securities and
Subordinated Interests. CMOs are structured so that principal and interest
payments received on the collateral are sufficient to make principal and
interest payments on the bonds. Such bonds may be issued by United States
government agencies or private issuers in one or more classes with fixed or
variable interest rates, maturities and degrees of subordination that are
characteristics designed for the investment objectives of different bond
purchasers.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commission" means the Securities and Exchange Commission.

"Commitments" means commitments issued by the Company that will obligate the
Company to purchase Mortgage Assets from or sell them to the holders of the
commitment for a specified period of time, in a specified aggregate principal
amount and at a specified price.

"Common Stock" means the Company's shares of Common Stock, $0.01 par value
per share.

"Company" means Apex Mortgage Capital, Inc., a Maryland corporation.

"Compensation Committee" means the committee of the Company's Board of
Directors comprised entirely of Unaffiliated Directors that will administer
the 1997 Stock Option Plan.

"Conforming Mortgage Loans" means conventional Mortgage Loans that either
comply with requirements for inclusion in credit support programs sponsored by
Fannie Mae, FHLMC, or GNMA or are FHA or VA Loans, all of which are secured by
first mortgages or deeds of trust on single-family (one to four units)
residences.

"Control Shares" means voting shares of stock which, if aggregated with all
other shares of stock previously acquired by the acquiror or in respect of
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority or (iii) a majority or more of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval.

"Control Share Acquisition" means the acquisition of control shares, subject
to certain exceptions.

"Counsel" means O'Melveny & Myers LLP.

"Counter-party" means a third-party financial institution with which the
Company enters into an interest rate cap agreement or similar agreement.

"Dealer Property" means real property and real estate mortgages other than
stock in trade, inventory or property held primarily for sale to customers in
the ordinary course of the Company's trade or business.

"Dollar-Roll Agreement" means an agreement to sell a security for delivery
on a specified future date and a simultaneous agreement to repurchase the same
or substantially similar security on a specified future date.

"11th District Cost of Funds Index" means the index made available monthly
by the Federal Home Loan Bank Board of the cost of funds to members of the
Federal Home Loan Bank 11th District.

"ERISA" means the Employee Retirement Income Security Act of 1974.

"ERISA Plan" means a pension, profit-sharing, retirement or other employee
benefit plan that is subject to ERISA.

79
<PAGE>

"Excess Servicing Rights" means contractual rights to receive a portion of
monthly mortgage payments of interest remaining after those payments of
interest have already been applied, to the extent required, to Pass-Through
Certificates and the administration of mortgage servicing. The mortgage
interest payments are secured by an interest in real property.

"Excess Shares" means the number of shares of capital stock held by any
person or group of persons in excess of 9.8% of the outstanding shares.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Fannie Mae" means the federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (12 U.S.C., (S) 1716 et seq.), formerly known as the Federal National
Mortgage Association.

"Fannie Mae Certificates" means guaranteed mortgage Pass-Through
Certificates issued by Fannie Mae either in certified or book-entry form.

"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.

"FHA" means the United States Federal Housing Administration.

"FHA Loans" means Mortgage Loans insured by the FHA.

"FHLMC" means the Federal Home Loan Mortgage Corporation.

"FHLMC Certificates" means mortgage participation certificates issued by
FHLMC, either in certificated or book-entry form.

"50%/5 Stockholder Test" means the requirement for qualification as a REIT
that during the last half of each taxable year not more than 50% in value of
the outstanding shares may be owned directly or indirectly by five or fewer
individuals.

"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.

"First Loss Subordinated Bonds" means any bonds that bear the "first loss"
from losses incurred in respect of Mortgage Assets upon foreclosure sales and
other liquidations of underlying mortgaged properties that result in failure
to recover all amounts due on the loans secured thereby.

"Foreclosure Property" means property acquired at or in lieu of foreclosure
of the mortgage secured by such property or a result of a default under a
lease of such property.

"Foreign Holder" means an initial purchaser of the Common Stock that, for
United States income tax purposes, is not a United States person.

"GAAP" means generally accepted accounting principles.

"GNMA" means the Government National Mortgage Association.

"GNMA Certificates" means fully modified pass-through mortgage-backed
certificates guaranteed by GNMA and issued either in certificated or book-
entry form.

"High Quality" means either (i) securities that are rated A or above by at
least one of the Rating Agencies, or (ii) securities that are unrated but are
obligations of the United States or obligations guaranteed by the United
States government or an agency or instrumentality thereof.

"Housing Act" means the National Housing Act of 1934, as amended.

80
<PAGE>

"HUD" means the Department of Housing and Urban Development.

"ICAA" means the Investment Counsel Association of America.

"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of a corporation's shares or an affiliate of a corporation
who, at any time within the ten-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then
outstanding voting stock of the corporation.

"Interest Only Derivatives" means Mortgage Derivative Securities
representing the right to receive interest only or a disproportionately large
amount of interest.

"International Purchase Agreement" means the agreement by and between the
Company, the Manager and the International Managers whereby the International
Managers agree to purchase all of the shares of Common Stock being sold
thereunder if any of such shares are purchased, subject to the terms and
conditions set forth therein.

"Inverse Floaters" means a class of CMOs with a coupon rate that moves
inversely to a designated index, such as LIBOR or the 11th District Cost of
Funds Index. Income floaters have coupon rates that typically change at a
multiple of the changes at the relevant index rate. Any rise in the index rate
(as a consequence of an increase in interest rates) causes a drop in the
coupon rate of an Inverse Floater while any drop in the index rate causes an
increase in the coupon of an Inverse Floater.

"Investment Company Act" means the Investment Company Act of 1940, as
amended.

"International Managers" means Merrill Lynch International, PaineWebber
International (U.K.) Ltd., Stifel, Nicolaus & Company, Incorporated and Sutro
& Co. Incorporated..

"Intersyndicate Agreement" means the agreement by and between the U.S.
Underwriters and the International Managers that provides for the coordination
of their activities.

"IRAs" means Individual Retirement Accounts.

"ISOs" means qualified incentive stock options granted under the 1997 Stock
Option Plan that meet the requirements of Section 422 of the Code.

"Issuers" means those entities that issue Mortgage Securities, including
trusts or subsidiaries organized by the Company and Affiliates of the Manager.

"Keogh Plans" means H.R. 10 Plans.

"LIBOR" means London-Inter-Bank Offered Rate.

"MGCL" means the Maryland General Corporation Law.

"Management Agreement" means the agreement by and between the Company and
the Manager whereby the Manager agrees to perform certain services to the
Company in exchange for certain compensation.

"Manager" means TCW Investment Management Company, a California corporation.

"Market Price" on any date shall mean, with respect to a class or series of
outstanding shares of the Company's stock, the Closing Price for such stock on
such date.

81
<PAGE>

"MBS Group" means the TCW Group's Mortgage-Backed Securities Group.

"Merrill Lynch & Co." means Merrill Lynch, Pierce, Fenner & Smith
Incorporated.

"Moody's" means Moody's Investors Service, Inc.

"Mortgage Assets" means (i) Mortgage Securities, (ii) Mortgage Loans and
(iii) Short-Term Investments.

"Mortgage Derivative Securities" means Mortgage Securities that are Interest
Only Derivatives or Principal Only Derivatives and may include other
derivative instruments.

"Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA
Loans and VA Loans.

"Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs and
(iii) Other Mortgage Securities.

"Mortgage Warehouse Participations" means participations in lines of credit
to mortgage originators that are secured by recently originated Mortgage Loans
that are in the process of being either securitized or sold to permanent
investors.

"Net Income" means the taxable income of the Company before the Manager's
incentive compensation, net operating loss deductions arising from losses in
prior periods and deductions permitted by the Code in calculating taxable
income for a REIT, including a deduction for the Company's interest expenses
for borrowed funds, plus the effects of adjustments, if any, necessary to
record hedging and interest transactions in accordance with GAAP.

"New Capital" means the proceeds from the sale of stock or certain debt
obligations.

"95% Distribution Test" means the stockholder distribution requirement
described in "Federal Income Tax Consequences--Requirements for Qualification
as a REIT--Distribution Requirement."

"95% of Income Test" means the income-based test that the Company must meet
to qualify as a REIT described in paragraph 2 of "Federal Income Tax
Consequences--Requirements for Qualification as a REIT-- Gross Income Tests."

"Nonconforming Mortgage Loans" means conventional Mortgage Loans that do not
conform to one or more requirements of Fannie Mae, FHA, FHLMC, GNMA or VA for
participation in one or more of such agencies' mortgage loan credit support
programs, such as the principal amounts financed or the underwriting
guidelines used in making the loan.

"Offering" means the 6,700,000 shares of Common Stock offered through the
Underwriters in connection with this Prospectus.

"One-Year U.S. Treasury Rate" means the average of the weekly average yield
to maturity for U.S. Treasury securities (adjusted to a constant maturity of
one year) as published weekly by the Federal Reserve Board during a yearly
period.

"Other Mortgage Assets" means Mortgage Assets that are unrated or whose
ratings have not been updated, including (i) Mortgage Loans, (ii) Pass-Through
Certificates and CMOs that are not High Quality but are backed by single-
family residential mortgage loans, and (iii) Other Mortgage Securities, that,
in each case, are determined to be comparable to a High Quality Mortgage
Security (by the standards of at least one of the Rating Agencies) on the
basis of credit or other enhancement features that meet the High Quality
Credit criteria as determined by the Manager and approved by the Company's
Board of Directors, including approval by a majority of the Unaffiliated
Directors

82
<PAGE>

"Other Mortgage Securities" means securities representing interests in, or
secured by mortgages on real property other than Pass-Through Certificates and
CMOs and may include non-High Quality certificates and other securities
collateralized by single-family loans, Mortgage Warehouse Participations,
Mortgage Derivative Securities, Subordinated Interests and other mortgage-
backed and mortgage-collateralized obligations.

"Pass-Through Certificates" means securities (or interests therein) other
than Mortgage Derivative Securities and Subordinated Interests evidencing
undivided ownership interests in a pool of mortgage loans, the holders of
which receive a "pass-through" of the principal and interest paid in
connection with the underlying mortgage loans in accordance with the holders'
respective, undivided interests in the pool. Pass-Through Certificates include
Agency Certificates, as well as other certificates evidencing interests in
loans secured by single-family properties.

"Principal Only Derivatives" means Mortgage Derivative Securities
representing the right to receive principal only or a disproportionate amount
of principal.

"Privately Issued Certificates" means mortgage participation certificates
issued by certain private institutions. These securities entitle the holder to
receive a pass-through of principal and interest payments in the underlying
pool of Mortgage Loans and are issued or guaranteed by the private
institution.

"Prohibited Transaction" means a transaction involving a sale of Dealer
Property, other than Foreclosure Property.

"Purchase Agreements" means the U.S. Purchase Agreement and International
Purchase Agreement.

"Qualified Hedges" means bona fide interest rate swap or cap agreements
entered into by the Company to hedge variable-rate indebtedness only that the
Company incurred to acquire or carry Qualified REIT Real Estate Assets and any
futures and options, or other investments (other than Qualified REIT Real
Estate Assets) made by the Company to hedge its Mortgage Assets or borrowings
that have been determined by the Company to generate qualified income for
purposes of the 95% of Income Test applicable to REITs.

"Qualifying Interests in Real Estate" means "mortgages and other liens on
and interests in real estate," as defined in Section 3(c)(5)(C) under the
Investment Company Act.

"Qualified REIT Real Estate Assets" means Pass-Through Certificates,
Mortgage Loans, Agency Certificates, and other assets of the type described in
Section 856(c)(6)(B) of the Code.

"Qualified REIT Subsidiary" means a corporation whose stock is entirely
owned by the REIT at all times during such corporation's existence.

"Qualified Temporary Investment Income" means income attributable to stock
or debt instruments acquired with new capital of the Company received during
the one-year period beginning on the day such proceeds were received.

"Rating Agencies" means Standard & Poor's Ratings Services, a division of
the McGraw-Hill Companies, and Moody's Investors Service, Inc.

"REIT" means a real estate investment trust as defined under Section 856 of
the Code.

"REIT Provisions of the Code" means Sections 856 through 860 of the Code.

"REMIC" means a real estate mortgage investment conduit.

"Residuals" means the right to receive the remaining or residual cash flows
from a pool of Mortgage Loans or Mortgage Securities after distributing
required amounts to the holders of interests in or obligations backed by such
loans or securities and after payment of any required pool expenses.

83
<PAGE>

"Return on Equity" means an amount calculated for any quarter by dividing
the Company's Net Income for the quarter by its Average Net Worth for the
quarter.

"Securities Act" means the Securities Act of 1933, as amended.

"Service" means the Internal Revenue Service.

"Servicers" means those entities that perform the servicing functions with
respect to Mortgage Loans or Excess Servicing Rights owned by the Company.

"Standard & Poor's" means Standard & Poor's Ratings Services, a division of
the McGraw-Hill Companies.

"75% of Assets Test" means the asset-based test requiring that on the last
day of each calendar quarter at least 75% of the Company's assets must consist
of Qualified REIT Real Estate Assets, government securities, cash and cash
items, as described in "Federal Income Tax Consequences--Requirements for
Qualification as a REIT--Asset Tests."

"75% of Income Test" means the income-based test that the Company must meet
to qualify as a REIT described in paragraph 1 of "Federal Income Tax
Consequences--Requirements for Qualification as a REIT-- Gross Income Tests."

"Short-Term Investments" means short-term bank certificates of deposit,
short-term United States Treasury securities, short-term United States
government agency securities, commercial paper, repurchase agreements, short-
term CMOs, short-term asset-backed securities and other similar types of
short-term investment instruments, all of which will have maturities or
average lives of less than one (1) year.

"1997 Stock Option Plan" means the stock option plan adopted by the Company.

"Subordinated Interests" means a class of Mortgage Securities that is
subordinated to one or more other classes of Mortgage Securities, all of which
classes share the same collateral.

"Suppliers of Mortgage Assets" means mortgage bankers, savings and loan
associations, investment banking firms, banks, home builders, insurance
companies and other concerns or lenders involved in mortgage finance or
originating and packaging mortgage loans, and their Affiliates.

"TAMCO" means TCW Asset Management Company.

"Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plans, Keogh plans, bank commingled trust funds
for such plans, and IRAs, and other similar entities intended to be exempt
from federal income taxation.

"Taxable Income" means for any year the taxable income of the Company for
such year (excluding any net income derived either from property held
primarily for sale to customers or from Foreclosure Property) subject to
certain adjustments provided in the REIT Provisions of the Code.

"TCW" means The TCW Group, Inc.

"TCW Group" means TCW and its subsidiaries and Affiliates.

"Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury
fixed interest rate securities (adjusted to a constant maturity of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is
not published by the Federal Reserve Board, any Federal Reserve Bank or agency
or department of the federal government selected by the Company. If the
Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot
be calculated as provided above, then the rate shall be the arithmetic average
of the per annum average yields to maturities,

84
<PAGE>

based upon closing asked prices on each business day during a quarter, for
each actively traded marketable U.S. Treasury fixed interest rate security
with a final maturity date not less than eight nor more than twelve years from
the date of the closing asked prices as chosen and quoted for each business
day in each such quarter in New York City by at least three recognized dealers
in U.S. government securities selected by the Company.

"TFMI" means TCW Funds Management, Inc.

"Trust" means a trust that is the transferee of that number of shares of
Common Stock the beneficial or constructive ownership of which otherwise would
cause a person to acquire or hold, directly or indirectly, shares of Common
Stock in an amount that violates the Company's Charter, which trust shall be
for the exclusive benefit of one or more Charitable Beneficiaries.

"Trustee" means a trustee of a Trust for the exclusive benefit of a
Charitable Beneficiary.

"25% of Assets Test" means the asset-based tests described in "Federal
Income Tax Consequences-- Requirements for Qualification as a REIT--Asset
Tests."

"UBTI" means "unrelated trade or business income" as defined in Section 512
of the Code.

"Unaffiliated Directors" means those directors that are not affiliated,
directly or indirectly, with the Manager or the TCW Group, whether by
ownership of, ownership interest in, employment by, any material business or
professional relationship with, or serving as an officer or director of the
Manager or the TCW Group, and are not employed by or officers of the Company.

"Underwriters" means the U.S. Underwriters and the International Managers.

"United States Holder" means an initial purchaser of the Common Stock that,
for United States income tax purposes, is a United States person (i.e., is not
a Foreign Holder).

"U.S. Purchase Agreement" means the agreement by and between the Company,
the Manager and the Underwriters whereby the Underwriters agree to purchase
all of the shares of Common Stock being sold thereunder if any of such shares
are purchased, subject to the terms and conditions set forth therein.

"U.S. Representatives" means Merrill Lynch & Co., PaineWebber Incorporated,
Stifel, Nicolaus & Company, Incorporated and Sutro & Co. Incorporated.

"U.S. Underwriters" means each of the underwriters listed in the U.S.
Purchase Agreement.

"VA" means the United States Veterans Administration.

"VA Loans" means Mortgage Loans partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended.

85
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Stockholder of Apex Mortgage Capital, Inc.

We have audited the accompanying balance sheet of Apex Mortgage Capital,
Inc. (the "Company") as of September 15, 1997. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.

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

In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Apex Mortgage Capital, Inc. as of
September 15, 1997, in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP

Los Angeles, California
September 16, 1997

F-1
<PAGE>

APEX MORTGAGE CAPITAL, INC.

BALANCE SHEET

SEPTEMBER 15, 1997

<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Cash ................................................................... $1,500
======
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
STOCKHOLDER'S EQUITY
Preferred Stock, par value $0.01 per share; 50,000,000 shares
authorized; Common Stock,
par value $0.01 per share; 100,000,000 shares authorized; 100 Common
Stock shares
issued and outstanding................................................. $ 1
Additional paid-in-capital.............................................. 1,499
------
Total Stockholder's Equity............................................ $1,500
======
</TABLE>

See accompanying notes to balance sheet.

F-2
<PAGE>

APEX MORTGAGE CAPITAL, INC.

NOTES TO BALANCE SHEET

SEPTEMBER 15, 1997

NOTE 1--THE COMPANY

Apex Mortgage Capital, Inc. (the "Company") was incorporated in Maryland and
was initially capitalized through the sale of 100 shares of Common Stock for
$1,500 on September 15, 1997. The Company will seek to acquire primarily
mortgage-backed securities and mortgage loans.

The Company has had no operations to date other than matters relating to the
organization and start-up of the Company. Accordingly, no statement of
operations is presented.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash

Cash includes cash on hand and deposits in banks. The Company has no cash
equivalents.

FEDERAL AND STATE INCOME TAXES

The Company will elect to be taxed as a real estate investment trust under
the Internal Revenue Code of 1986, as amended, and generally will not be
subject to federal and state taxes on its income to the extent it distributes
annually 95% of its predistribution taxable income to stockholders and
maintains its qualification as a real estate investment trust.

INCOME RECOGNITION

Income and expenses are to be recorded on the accrual basis of accounting.

STOCK OPTIONS

The Company accounts for stock options to employees and directors of the
Company using the intrinsic value method. All other stock options are
accounted for using the fair value method.

NOTE 3--TRANSACTIONS WITH AFFILIATES

The Company intends to enter into a Management Agreement (the "Management
Agreement") with TCW Investment Management Company (the "Manager"), a wholly-
owned subsidiary of The TCW Group, Inc., under which the Manager will manage
its day-to-day operations, subject to the direction and oversight of the
Company's Board of Directors. The Company will pay the Manager annual base
management compensation, payable quarterly, equal to 3/4 of 1% of the Average
Net Invested Capital, as defined in the Management Agreement. The Company will
also pay the Manager, as incentive compensation, an amount equal to 30% of the
Net Income of the Company, before incentive compensation, in excess of the
amount that would produce an annualized Return on Equity equal to the Ten-Year
U.S. Treasury Rate plus 1%, as defined in the Management Agreement.

NOTE 4--PUBLIC OFFERING OF COMMON STOCK

The Company is in the process of filing a Registration Statement for the
sale of its common stock. Contingent upon the consummation of the public
offering, the Company will be liable for organization and offering expenses in
connection with the sale of the shares offered.

F-3
<PAGE>

APEX MORTGAGE CAPITAL, INC.

NOTES TO BALANCE SHEET--(CONTINUED)

NOTE 5--STOCK OPTION PLAN

The Company has adopted a stock option plan (the "1997 Stock Option Plan")
that provides for qualified incentive stock options, non-qualified stock
options, stock appreciation rights and dividend equivalent rights. Directors,
officers and key employees of the Company and the Manager are eligible to
participate in the 1997 Stock Option Plan. The exercise price for any option
granted under the 1997 Stock Option Plan may not be less than 100% of the fair
market value of the shares of the Company's Common Stock at the time the
option is granted. The 1997 Stock Option Plan authorizes the grant of options
to purchase an aggregate of up to 10% of the outstanding shares of the
Company's common stock, but not more than 1,000,000 shares.

No options or rights have yet been granted under the 1997 Stock Option Plan.
The Company intends to grant options to purchase 400,000 shares of Common
Stock, effective on the closing of the public offering of Common Stock. The
options will be exercisable starting one year after the date of grant. The
fair value of the options cannot be determined until the closing of the public
offering.

F-4
<PAGE>

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

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY
THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 15
Use of Proceeds........................................................... 26
Dividend and Distribution Policy.......................................... 26
Capitalization............................................................ 27
Liquidity and Capital Resources........................................... 27
Business and Strategy..................................................... 28
Management of the Company................................................. 44
The Manager............................................................... 49
Security Ownership of Certain Beneficial Owners and Management............ 58
Federal Income Tax Consequences .......................................... 59
ERISA Considerations...................................................... 68
Description of Capital Stock.............................................. 68
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 71
Underwriting.............................................................. 74
Legal Matters............................................................. 77
Experts................................................................... 77
Additional Information.................................................... 77
Glossary.................................................................. 78
</TABLE>

UNTIL DECEMBER 28, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

6,700,000 SHARES

[LOGO OF APEX MORTGAGE CAPITAL, INC.]

COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH & CO.

PAINEWEBBER INCORPORATED

STIFEL, NICOLAUS & COMPANY
INCORPORATED

SUTRO & CO. INCORPORATED

DECEMBER 3, 1997

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PROSPECTUS
6,700,000 SHARES
[LOGO OF APEX MORTGAGE CAPITAL, INC.]
COMMON STOCK

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

All of the shares of common stock (the "Common Stock") offered hereby are
being sold by Apex Mortgage Capital, Inc. (the "Company"). Of the 6,700,000
shares of Common Stock offered hereby, 1,340,000 shares of Common Stock are
being offered initially outside of the United States by the International
Managers (the "International Offering") and the remaining 5,360,000 shares of
Common Stock are being offered concurrently by the U.S. Underwriters initially
in the United States (the "U.S. Offering" and, collectively, the "Offering").
The initial public offering price and the underwriting discount per share are
identical for each Offering. At the request of the Company, the U.S.
Underwriters have reserved an aggregate of up to 500,000 shares of Common
Stock for sale at the initial public offering price to an affiliate of The TCW
Group, Inc. and directors, officers and employees of the Company, The TCW
Group, Inc. and its affiliates. Prior to the Offering, there has been no
public market for the Common Stock. See "Underwriting" for information
relating to the determination of the initial public offering price. The Common
Stock has been approved for listing, subject to official notice of issuance,
on the New York Stock Exchange under the symbol "AXM."

---------------
SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR MATERIAL RISKS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE
RISKS INCLUDE:

. Interest rate fluctuations may
decrease net interest income from
Mortgage Assets.

. The Company's policies and
strategies may be changed without
the consent of stockholders.

. Failure to maintain REIT status
would substantially reduce the
amount of cash available for
distribution to the Company's
stockholders.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............. $15.00 $1.05 $13.95
- -------------------------------------------------------------------------------
Total(3).............. $100,500,000 $7,035,000 $93,465,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,000,000, payable by the Company.
The underwriting discount payable to the U.S. Underwriters for shares of
Common Stock reserved for sale to an affiliate of The TCW Group, Inc. will
be reduced by $248,080, and the net proceeds to the Company will be
increased by such amount. See "Use of Proceeds" and "Underwriting."
(3) The Company has granted to the International Managers and the U.S.
Underwriters options, exercisable within 30 days of the date hereof, to
purchase up to 201,000 and 804,000 additional shares of Common Stock,
respectively, solely to cover over-allotments, if any. If such over-
allotment options are exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $115,575,000,
$8,090,250, and $107,484,750, respectively. See "Underwriting."

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

The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by the
Underwriters and subject to approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the shares of Common Stock will be
made in New York, New York on or about December 9, 1997.
---------------
MERRILL LYNCH INTERNATIONAL
PAINEWEBBER INTERNATIONAL
STIFEL, NICOLAUS & COMPANY
INCORPORATED
SUTRO & CO. INCORPORATED
---------------

The date of this Prospectus is December 3, 1997.
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 4
The Company.............................................................. 4
Summary Risk Factors..................................................... 5
The Manager.............................................................. 8
Industry Trends.......................................................... 10
Business and Strategy.................................................... 10
Mortgage Assets.......................................................... 11
Management Policies and Programs......................................... 11
Asset Acquisition Policy................................................. 11
Capital and Leverage Policy.............................................. 11
Credit Risk Management Policy............................................ 12
Asset/Liability Management Policies...................................... 12
Interest Rate Risk Management Policy.................................... 12
Prepayment Risk Management Policy....................................... 13
Dividend Policy and Distributions........................................ 13
The Offering............................................................. 14
RISK FACTORS.............................................................. 15
Lack of Prior Experience................................................. 15
No Current Borrowing Arrangements........................................ 15
Control by the Company's Board of Directors of the Company's Operating
Policies and Investment Strategies...................................... 16
No Current Mortgage Assets............................................... 16
Possible Significant Termination Fee Payable to the Manager.............. 16
Nominal Capitalization................................................... 17
Interest Rate Fluctuations May Decrease Net Interest Income.............. 17
Substantial Leverage and Potential Net Interest and Operating Losses in
Connection With Borrowings.............................................. 17
Failure to Maintain REIT Status Would Result in the Company Being Subject
to Tax as a Regular Corporation and Substantially Reduce Cash Available
for Distribution to Stockholders........................................ 18
Litigation............................................................... 19
Failure to Successfully Manage Interest Rate Risk May Adversely Affect
Results of Operations................................................... 19
Increased Levels of Prepayments from Mortgage Assets May Adversely Affect
Net Interest Income..................................................... 20
Dependence on the Manager and Its Personnel for Successful Operations.... 20
Conflicts of Interest Between the Company and the Manager and Its
Affiliates.............................................................. 20
Investment in Short-Term Investments Pending Acquisition of Mortgage
Assets May Initially Adversely Affect Results of Operations............. 21
Failure to Maintain An Exemption from the Investment Company Act Would
Adversely Affect Results of Operations.................................. 21
Absence of Public Market and No Assurance That a Public Market Will
Develop................................................................. 22
Interest Rate Fluctuations May Adversely Affect the Market Price of the
Common Stock............................................................ 22
Value of Mortgage Assets May Be Adversely Affected by Defaults on
Underlying Mortgage Obligations......................................... 22
Active Formation and Operation of Competing Mortgage REITs May Adversely
Affect the Market Price of the Common Stock............................. 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adverse Tax Treatment of Excess Inclusion Income......................... 22
Value of Mortgage Loans May Be Adversely Affected by Characteristics of
Underlying Property and Borrower Credit................................. 23
Effect of Future Offerings of Debt and Equity on Market Price of the
Common Stock............................................................ 24
Restrictions on Ownership of the Common Stock............................ 24
USE OF PROCEEDS........................................................... 26
DIVIDEND AND DISTRIBUTION POLICY.......................................... 26
CAPITALIZATION............................................................ 27
LIQUIDITY AND CAPITAL RESOURCES........................................... 27
BUSINESS AND STRATEGY..................................................... 28
General.................................................................. 28
Strategy................................................................. 28
Competition for Mortgage Assets.......................................... 30
Description of Mortgage Assets........................................... 31
Management Policies and Programs......................................... 37
Asset Acquisition Policy................................................. 37
Capital and Leverage Policy.............................................. 38
Credit Risk Management Policy............................................ 40
Asset/Liability Management Policies...................................... 41
Interest Rate Risk Management Policy.................................... 41
Prepayment Risk Management Policy....................................... 42
Mortgage Loan Securitization Techniques.................................. 42
Other Policies........................................................... 43
Future Revisions in Policies and Strategies.............................. 43
Legal Proceedings........................................................ 43
MANAGEMENT OF THE COMPANY................................................. 44
Directors and Executive Officers ........................................ 44
Executive Compensation................................................... 47
Stock Options............................................................ 47
Stock Options Outstanding................................................ 48
THE MANAGER............................................................... 49
The Management Agreement................................................. 51
Manager Compensation..................................................... 53
Expenses................................................................. 54
Certain Relationships; Conflicts of Interest............................. 56
Limits of Responsibility................................................. 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 58
FEDERAL INCOME TAX CONSEQUENCES........................................... 59
ERISA CONSIDERATIONS...................................................... 68
DESCRIPTION OF CAPITAL STOCK.............................................. 68
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS................................................................... 71
UNDERWRITING.............................................................. 74
LEGAL MATTERS............................................................. 76
EXPERTS................................................................... 77
ADDITIONAL INFORMATION.................................................... 77
GLOSSARY.................................................................. 78
AUDITORS' REPORT.......................................................... F-1
BALANCE SHEET............................................................. F-2
</TABLE>

3
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in an international purchase
agreement (the "International Purchase Agreement"), the Company has agreed to
sell to each of the underwriters named below (the "International Managers"),
and each of the International Managers has severally agreed to purchase from
the Company the number of shares of Common Stock set forth opposite its name
below.

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
--------------------- ---------
<S> <C>
Merrill Lynch International...................................... 335,000
PaineWebber International (U.K.) Ltd............................. 335,000
Stifel, Nicolaus & Company, Incorporated......................... 335,000
Sutro & Co. Incorporated......................................... 335,000
---------
Total.......................................................... 1,340,000
=========
</TABLE>

The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters in the United States (the
"U.S. Underwriters" and, together with the International Managers, the
"Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch & Co."), PaineWebber Incorporated, Stifel, Nicolaus & Company,
Incorporated and Sutro & Co. Incorporated are acting as representatives (the
"U.S. Representatives"). Subject to the terms and conditions set forth in the
U.S. Purchase Agreement, the Company has agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters have severally agreed to purchase, an
aggregate of 5,360,000 shares of Common Stock. The initial public offering
price per share and the underwriting discount per share are identical under the
International Purchase Agreement and the U.S. Purchase Agreement.

In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock being sold pursuant to such Purchase Agreement if any of
the shares of Common Stock are purchased. In the event of a default by one or
more of the Underwriters, the commitments of the non-defaulting International
Managers or U.S. Underwriters, as the case may be, may be increased or the
International Purchase Agreement or the U.S. Purchase Agreement, as the case
may be, may be terminated.

The International Managers have advised the Company that they propose to
offer the shares of Common Stock offered hereby to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $.63 per share
of Common Stock, and that the International Managers may allow, and such
dealers may reallow, a discount not in excess of $.10 per share of Common Stock
on sales to certain other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.

The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the International Managers and the U.S. Underwriters are permitted
to sell shares of Common Stock to each other for purposes of resale at the
initial public offering price, less an amount not greater than the selling
concession. Under the terms of the Intersyndicate Agreement, the International
Managers and any dealer to whom they sell shares of Common Stock will not offer
to sell or sell shares of Common Stock to persons who are United States persons
or to persons they believe intend to resell to persons who are United States
persons, and the U.S. Underwriters and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to persons
who are non-United States persons or to persons they believe intend to resell
to persons who are non-United States persons, except in each case for
transactions pursuant to the Intersyndicate Agreement.

Each International Manager has agreed that (i) it has not offered or sold,
and will not for a period of six months from the closing date of the Offering
offer to sell, in the United Kingdom, directly or indirectly, by means of any
document, any shares of Common Stock offered hereby, other than to persons
whose ordinary

74
<PAGE>

activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances that has not resulted and will not result in an
offer to the public within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the shares of Common Stock in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in
connection with the issue of the shares of Common Stock to a person who is of
a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a
person to whom the document may otherwise lawfully be issued or passed on.

Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
their country of purchase, in addition to the offering price set forth on the
cover page hereof.

The Company has granted to the International Managers an option, exercisable
for 30 days after the date hereof, to purchase up to an aggregate of 201,000
additional shares of Common Stock and to the U.S. Underwriters an option,
exercisable for 30 days after the date hereof, to purchase up to 804,000
additional shares of Common Stock solely to cover over-allotments, if any, at
the initial public offering price, less the underwriting discount set forth on
the cover page of this Prospectus. To the extent that the International
Managers exercise their option, each of the International Managers will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the foregoing table is of the number of shares of
Common Stock initially purchased by the International Managers.

The International Managers and the U.S. Representatives have advised the
Company that the Underwriters do not intend to confirm sales to any account
over which they exercise discretionary authority.

75
<PAGE>

conditions and other factors. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade
in the public market subsequent to the Offering at or above the initial public
offering price.

Certain of the Underwriters have performed, and may continue to perform,
investment banking, broker-dealer and financial advisory services for the
Company and certain of its Affiliates and have received and will receive
customary compensation therefor.

The Underwriters undertake that the minimum distribution, issuance and
aggregate market value requirements for listing on the New York Stock Exchange
will be achieved in the Offering.

LEGAL MATTERS

76
<PAGE>

LLP, will rely as to certain matters of Maryland law on the opinion of Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland. In addition, the description
of federal income tax consequences contained in this Prospectus entitled
"Federal Income Tax Consequences" is based upon the opinion of O'Melveny &
Myers LLP.

EXPERTS

ADDITIONAL INFORMATION

77
<PAGE>

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

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 15
Use of Proceeds........................................................... 26
Dividend and Distribution Policy.......................................... 26
Capitalization............................................................ 27
Liquidity and Capital Resources........................................... 27
Business and Strategy..................................................... 28
Management of the Company................................................. 44
The Manager............................................................... 49
Security Ownership of Certain Beneficial Owners and Management............ 58
Federal Income Tax Consequences .......................................... 59
ERISA Considerations...................................................... 68
Description of Capital Stock.............................................. 68
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 71
Underwriting.............................................................. 74
Legal Matters............................................................. 76
Experts................................................................... 77
Additional Information.................................................... 77
Glossary.................................................................. 78
</TABLE>

6,700,000 SHARES
[LOGO OF APEX MORTGAGE CAPITAL, INC.]
APEX MORTGAGE
CAPITAL, INC.

COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH INTERNATIONAL

PAINEWEBBER INTERNATIONAL

STIFEL, NICOLAUS & COMPANY
INCORPORATED

SUTRO & CO. INCORPORATED

DECEMBER 3, 1997

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