ANTHRACITE MORTGAGE CAPITAL INC, S-11/A, 1998-03-03

ANTHRACITE MORTGAGE CAPITAL INC
S-11/A, 1998-03-03
MORTGAGE BANKERS & LOAN CORRESPONDENTS

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As filed with the Securities and Exchange Commission on March 2, 1998
Registration No. 333-40813

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 3
TO

FORM S-11

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

_________________

ANTHRACITE CAPITAL, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)

_________________

345 Park Avenue, 29th Floor, New York, New York 10154
(212) 754-5560
(Address, Including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)

_________________

Hugh R. Frater
President
Anthracite Capital, Inc.
345 Park Avenue, 29th Floor
New York, New York 10154
(212) 754-5560
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
_________________

COPIES TO:

VINCENT J. PISANO, ESQ. GEORGE C. HOWELL III, ESQ.
SKADDEN, ARPS, SLATE RANDOLPH F. TOTTEN, ESQ.
MEAGHER & FLOM LLP HUNTON & WILLIAMS
919 THIRD AVENUE 951 EAST BYRD STREET
NEW YORK, NEW YORK 10022 RICHMOND, VIRGINIA 23219
TELEPHONE: (212) 735-2790 TELEPHONE: (804) 788-8200
FACSIMILE: (212) 735-2000 FACSIMILE: (804) 788-8218
_________________

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.

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

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

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

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

CALCULATION OF REGISTRATION FEE

PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BEING REGISTERED REGISTERED (1) PER SHARE PRICE(2) FEE

<S> <C> <C> <C> <C>
Common Stock, par
value $0.001 per
share 330,000 shares $20.00 $6,600,000 $ (3)

</TABLE>

(1) Includes [ ] shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any (the "Underwriting).

(2) Estimated based on a bona fide estimate of the maximum offering price
of $20.00 solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933.

(3) A fee of $2,000.00 was paid on November 21, 1997.

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

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH __, 1998

PROSPECTUS

__________ SHARES

ANTHRACITE CAPITAL, INC.

COMMON STOCK

Anthracite Capital, Inc. (the "Company") is a Maryland corporation
organized in November 1997 that will invest in a diversified portfolio of
multifamily, commercial and residential mortgage loans, mortgage-backed
securities and other real estate related assets in U.S. and non U.S.
markets financed by the proceeds of this offering, future offerings of
equity securities and borrowings. The Company will seek to achieve strong
investment returns by maximizing the spread of investment income (net of
credit losses) earned on its real estate assets over the cost of financing
and hedging these assets and/or liabilities. The Company's business
decisions will depend on changing market factors and the Company will
pursue various strategies and opportunities in different market
environments. 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"), and generally will not be subject to federal taxes on
its income to the extent that it distributes its net income to stockholders
and maintains its qualification as a REIT. The Company's operations will
be managed by BlackRock Financial Management, Inc. (the "Manager" or
"BlackRock"), a subsidiary of PNC Bank Corp. ("PNC"). The Company has no
ownership interest in the Manager.

All of the shares of common stock (the "Common Stock") offered hereby
are being sold by the Company. The Common Stock offered to the public
hereby will represent all of the equity ownership of the Company, except as
follows. First, PNC has agreed to purchase directly from the Company, at a
price equal to the initial public offering price less the underwriting
discount, a number of shares of Common Stock such that following completion
of the offering made hereby (the "Offering") and the Underwriters' exercise
of the over-allotment option, if any, PNC will own 3% of the shares of
Common Stock outstanding. Second, FBR Asset Investment Corporation, an
affiliate of Friedman, Billings, Ramsey and Co., Inc., one of the
Representatives of the Underwriters, has agreed to acquire $10 million of
Common Stock in a private placement that will close concurrently with this
Offering at the initial public offering price, net of underwriting
discounts and commissions.

Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price
for the Common Stock will be between $____ and $____ per share. See
"Underwriting" for information relating to the determination of the initial
public offering price. Application has been made to list the Common Stock
on the New York Stock Exchange (the "NYSE") under the symbol " " Defined
terms used herein are set forth in the Glossary commencing on page G-1.

______________

SEE "RISK FACTORS" COMMENCING ON PAGE __ FOR A DISCUSSION OF MATERIAL
RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK OFFERED HEREBY, INCLUDING:

o The Company and the Manager have common officers and directors, which
may present conflicts of interest in the Company's dealings with the
Manager and its Affiliates, including the Company's purchase of assets
from the Manager's Affiliates and the Manager's allocation of
investment opportunities to the Company;
o The Manager is a majority-owned subsidiary of PNC Bank, National
Association ("PNC Bank") and therefore PNC Bank will be able to
influence the affairs of the Manager and, consequently, the investment
decisions of the Company;
o The Company was organized in November 1997, had no assets at December
31, 1997 and has no operating history and there is no prior market for
the Common Stock;
o Only approximately $ million in purchase price of the
Company's assets have been identified and delays in investing the
balance of the proceeds of the Offering would result in reduced
income;
o The Company has no established financing sources and there is no
assurance that financing will be available on favorable terms;
The Company will face substantial competition in acquiring suitable
investments, which could increase its costs;
o The Company is totally reliant on the Manager; the Manager has never
managed a REIT and there can be no assurance that the past experience
of the Manager will be sufficient to successfully manage the business
of the Company;
o The Company intends to acquire significant amounts of mortgage loans
and non-investment grade mortgage-backed securities, which are likely
to be subject to significant credit risk of loss of principal and non-
payment of interest;
o The yield on the Company's investments, including Interest Only
securities ("IOs"), and the value of the Company's Common Stock, will
be sensitive to changes in prevailing interest rates and changes in
prepayment rates, which may result in a mismatch between the Company's
borrowing rates and asset yields and consequently reduce or eliminate
net income from the Company's investments;
o The Company's operations are expected to be highly leveraged and there
are no limitations on borrowings, which is likely to increase the
volatility of the Company's income and net asset value and could
result in operating or capital losses;
o The Company intends to use hedging strategies that involve risk and
that may not be successful in insulating the Company from exposure to
changing interest and prepayment rates;
o The Company will be taxed as a regular corporation if it fails to
qualify or maintain its qualification as a REIT, which would reduce
earnings and cash available for distribution to stockholders;
o The Company's investment and operating policies and strategies may be
changed at any time without the consent of stockholders;
o The Management Agreement provides for base management fees payable to
the Manager without consideration of the performance of the Company's
portfolio and also provides for incentive fees based on certain
performance criteria, which could result in the Manager recommending
riskier or more speculative investments;
o Termination of the Management Agreement by the Company may result in
the payment of a substantial termination fee which could adversely
affect the Company's financial condition;
o Stockholders will be subject to significant potential dilution from
future equity offerings, including offerings of preferred stock; and
o The Company's activities, structure and operations may be adversely
affected by changes in the tax laws applicable to REITs.

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

UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY

PER SHARE $ $ $
TOTAL (3) $ $ $

(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 $_______, PAYABLE BY THE
COMPANY.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO
PURCHASE UP TO AN AGGREGATE OF [ ] ADDITIONAL SHARES OF
COMMON STOCK AT THE SAME TERMS AND CONDITIONS AS SET FORTH ABOVE. IF
SUCH OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNT AND PROCEEDS TO THE COMPANY WILL BE $_______,
$_______, AND $______, 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 _______, 1998.

________________

FRIEDMAN, BILLINGS, RAMSEY & CO., INC. LEHMAN BROTHERS PRUDENTIAL
SECURITIES INCORPORATED

________________

The date of this Prospectus is _________, 1998.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE THE
MARKET PRICE, 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 AND THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN 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.

THE COMPANY MAY PROVIDE PROJECTIONS, FORECASTS OR ESTIMATES OF FUTURE
PERFORMANCE OR CASH FLOWS OF THE COMPANY. PROJECTIONS, FORECASTS AND
ESTIMATES ARE ALSO FORWARD-LOOKING STATEMENTS AND WILL BE BASED UPON
CERTAIN ASSUMPTIONS. ACTUAL EVENTS ARE DIFFICULT TO PREDICT AND MAY BE
BEYOND THE COMPANY'S CONTROL. ACTUAL EVENTS MAY DIFFER FROM THOSE ASSUMED.
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.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT ANY ESTIMATED RETURNS OR
PROJECTIONS CAN BE REALIZED OR THAT ACTUAL RETURNS OR RESULTS WILL NOT BE
MATERIALLY LOWER THAN THOSE THAT MAY BE ESTIMATED.

TABLE OF CONTENTS

Page

PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . 1
RELATIONSHIP WITH PNC . . . . . . . . . . . . . . . . . . . . . . . 3
SUMMARY RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . 3
CREDIT RISK MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 5
INITIAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE MANAGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ORGANIZATION AND RELATIONSHIPS . . . . . . . . . . . . . . . . . . . . . 6
THE MANAGEMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . 6
MANAGEMENT COMPENSATION . . . . . . . . . . . . . . . . . . . . . . 7
CONFLICTS OF INTEREST OF THE MANAGER . . . . . . . . . . . . . . . . . . 8
TAX STATUS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . 9
CERTAIN BENEFITS TO RELATED PARTIES . . . . . . . . . . . . . . . . . . . 9
INDUSTRY TRENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
DIVIDEND POLICY AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . 11
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
CONFLICTS OF INTEREST OF THE MANAGER MAY RESULT IN DECISIONS THAT
DO NOT FULLY REFLECT STOCKHOLDERS' BEST INTERESTS . . . . . . 12
NO OPERATING HISTORY; NO IDENTIFIED ASSETS; NO ESTABLISHED
FINANCING; NO PRIOR MARKET FOR COMMON STOCK . . . . . . . . . 13
DEPENDENCE ON THE MANAGER; TERMINATION OF MANAGEMENT AGREEMENT . . 13
INTEREST RATE FLUCTUATIONS WILL AFFECT VALUE OF MORTGAGE ASSETS,
NET INCOME AND COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . 13
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Interest Rate Mismatch Could Occur Between Asset Yields and
Borrowing Rates Resulting in Decreased Yield . . . . . . . . 14
Inverted Yield Curve Adversely Affects Income . . . . . . . . . . 14
Ownership of Non-Investment Grade Mortgage Assets Subject To
Increased Risk of Loss . . . . . . . . . . . . . . . . . . . 14
Prepayment Rates Can Increase, Thus Adversely Affecting Yields . . 15
RISK OF LOSS ON MORTGAGE LOANS . . . . . . . . . . . . . . . . . . 15
Multifamily and Commercial Loans Involve a Greater Risk of Loss
than Single Family Loans . . . . . . . . . . . . . . . . . . 15
Volatility of Values of Mortgaged Properties May Affect Adversely
the Company's Mortgage Loans16Construction, Bridge and
Mezzanine Loans Involve Greater Risks of Loss than Loans
Secured by Income Producing Properties . . . . . . . . . . . 16
Distressed Mortgage Loans May Have Greater Default Risks than
Performing Loans . . . . . . . . . . . . . . . . . . . . . . 16
Risks Related to Investments in Real Property . . . . . . . . . . 16
LEVERAGE INCREASES EXPOSURE TO LOSS . . . . . . . . . . . . . . . 17
HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO
LOSSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
TAX, LEGAL AND OTHER RISKS . . . . . . . . . . . . . . . . . . . . 19
Failure to Maintain REIT Status would have Adverse Tax
Consequences . . . . . . . . . . . . . . . . . . . . . . . . 19
Risk of Changes in the Tax Law Applicable to REITs . . . . . . . . 20
Risk of Adverse Tax Treatment of Excess Inclusion Income . . . . . 20
Risk that Potential Future Offerings Could Dilute the Interest of
Holders of Common Stock . . . . . . . . . . . . . . . . . . . 20
Future Revisions in Policies and Strategies Without Stockholder
Consent Create Uncertainty for Investors . . . . . . . . . . 20
Significant Competition May Adversely Affect the Company's
Ability to Acquire Assets . . . . . . . . . . . . . . . . . . 20
Failure to Maintain Exclusion from the Investment Company Act
Would Restrict the Company's Operating Flexibility . . . . . 21
Failure to Develop a Public Market May Result in a Decrease in
Market Price . . . . . . . . . . . . . . . . . . . . . . . . 21
Temporary Investment in Short-term Investments Will Reduce the
Earnings of the Company . . . . . . . . . . . . . . . . . . . 21
Restrictions on Ownership of the Common Stock . . . . . . . . . . 21
Possible Environmental Liabilities . . . . . . . . . . . . . 22
Investments May Be Illiquid and Their Value May Decrease. . . . . 23
Plans Should Consider ERISA Risks of Investing in Common Stock . . 23
Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . . . 23
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DIVIDEND AND DISTRIBUTION POLICY . . . . . . . . . . . . . . . . . . . 24
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST . . . . . . . . . . . . . 25
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
INVESTMENT STRATEGY . . . . . . . . . . . . . . . . . . . . . . . 26
OPERATING POLICIES AND STRATEGIES . . . . . . . . . . . . . . . . 27
OPERATING POLICIES . . . . . . . . . . . . . . . . . . . . . . . . 27
CAPITAL AND LEVERAGE POLICIES . . . . . . . . . . . . . . . . . . 28
LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
RELATIONSHIP WITH PNC . . . . . . . . . . . . . . . . . . . . . . 29
SECURITIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CREDIT RISK MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 31
ASSET/LIABILITY MANAGEMENT . . . . . . . . . . . . . . . . . . . . 31
HEDGING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . 32
OTHER POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . 32
FUTURE REVISIONS IN POLICIES AND STRATEGIES . . . . . . . . . . . 33
DESCRIPTION OF REAL ESTATE RELATED ASSETS . . . . . . . . . . . . . . . 33
MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . 33
DISTRESSED MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . 34
CONSTRUCTION FINANCING, BRIDGE FINANCING AND LOANS SUBJECT TO
PRIOR LIENS . . . . . . . . . . . . . . . . . . . . . . . . . 34
COMMITMENTS TO MORTGAGE LOAN SELLERS . . . . . . . . . . . . . . . 34
BRIDGE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
MORTGAGE-BACKED SECURITIES . . . . . . . . . . . . . . . . . . . . 36
COMMERCIAL MORTGAGE-BACKED SECURITIES . . . . . . . . . . . . . . 38
FHA AND GNMA PROJECT LOANS . . . . . . . . . . . . . . . . . . . . 39
PASS-THROUGH CERTIFICATES . . . . . . . . . . . . . . . . . . . . 39
PRIVATELY ISSUED PASS-THROUGH CERTIFICATES . . . . . . . . . . . . 39
FNMA CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . 39
FHLMC CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . 40
GNMA CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . 40
CMOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
MORTGAGE DERIVATIVES . . . . . . . . . . . . . . . . . . . . . . . 41
MULTIFAMILY AND COMMERCIAL REAL PROPERTIES . . . . . . . . . . . . 41
FOREIGN REAL PROPERTIES . . . . . . . . . . . . . . . . . . . . . 43
REAL PROPERTIES WITH KNOWN ENVIRONMENTAL PROBLEMS . . . . . . . . 43
NET LEASED REAL ESTATE . . . . . . . . . . . . . . . . . . . . . . 44
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL
ESTATE ACTIVITIES AND
INVESTMENTS IN OTHER SECURITIES . . . . . . . . . . . . . . . 44
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 44
MANAGEMENT OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . 45
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY . . . . . . . . . 45
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . 50
STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 50
STOCK OPTIONS OUTSTANDING . . . . . . . . . . . . . . . . . . . . 51
THE MANAGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
THE MANAGEMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . 52
MANAGEMENT COMPENSATION . . . . . . . . . . . . . . . . . . . . . 54
EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
LIMITS OF RESPONSIBILITY . . . . . . . . . . . . . . . . . . . . . 58
INITIAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 58
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
LB SERIES 1998-C1, CLASSES F, G, H, J, K, L AND M . . . . . . . . 59
CERTAIN CHARACTERISTICS OF THE LB MORTGAGE LOANS . . . . . . . . . . . 61
YIELD CONSIDERATIONS RELATED TO THE LB INVESTMENTS . . . . . . . . . . 63
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . 63
TAXATION OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . 63
REQUIREMENTS FOR QUALIFICATION . . . . . . . . . . . . . . . . . . 65
INCOME TESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
ASSET TESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
DISTRIBUTION REQUIREMENTS . . . . . . . . . . . . . . . . . . . . 69
RECORDKEEPING REQUIREMENTS . . . . . . . . . . . . . . . . . . . . 70
FAILURE TO QUALIFY . . . . . . . . . . . . . . . . . . . . . . . . 70
TAXATION OF TAXABLE U.S. STOCKHOLDERS . . . . . . . . . . . . . . 70
TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK . 72
CAPITAL GAINS AND LOSSES . . . . . . . . . . . . . . . . . . . . . 72
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING . . . . 73
TAXATION OF TAX-EXEMPT STOCKHOLDERS . . . . . . . . . . . . . . . 73
TAXATION OF NON-U.S. STOCKHOLDERS . . . . . . . . . . . . . . . . 74
STATE AND LOCAL TAXES . . . . . . . . . . . . . . . . . . . . . . 75
TAXATION OF ASC . . . . . . . . . . . . . . . . . . . . . . . . . 75
PROPOSED TAX LEGISLATION . . . . . . . . . . . . . . . . . . . . . 76
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 76
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . 77
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER . . . . . . . . 77
DIVIDEND REINVESTMENT PLAN . . . . . . . . . . . . . . . . . . . . 79
MATERIAL PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS . . . . . . 79
REMOVAL OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . 79
STAGGERED BOARD . . . . . . . . . . . . . . . . . . . . . . . . . 79
BUSINESS COMBINATIONS . . . . . . . . . . . . . . . . . . . . . . 80
CONTROL SHARE ACQUISITIONS . . . . . . . . . . . . . . . . . . . . 80
AMENDMENT TO THE ARTICLES OF INCORPORATION . . . . . . . . . . . . 81
DISSOLUTION OF THE COMPANY . . . . . . . . . . . . . . . . . . . . 81
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS . . . . . 81
POSSIBLE ANTI-TAKEOVER EFFECT OF MATERIAL PROVISIONS OF MARYLAND
LAW AND OF THE ARTICLES OF INCORPORATION AND BYLAWS . . . . . 81
TRANSFER AGENT AND REGISTRAR . . . . . . . . . . . . . . . . . . . 81
REPORTS TO STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . 82
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 85
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
AUDIT REPORT OF DELOITTE & TOUCHE . . . . . . . . . . . . . . . . . . . F-1
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-5

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. Capitalized and other terms used herein
shall have the meanings assigned to them in the Glossary, which starts at
page G-1. Unless otherwise indicated, the information in this Prospectus
assumes that the Underwriters' over-allotment option will not be 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

GENERAL

Anthracite Capital, Inc. (the "Company"), a Maryland corporation, was
formed in November 1997, to invest in multifamily, commercial and
residential mortgage loans, mortgage-backed securities and other real
estate related assets in both U.S. and non U.S. markets. The Company will
use its equity capital and borrowed funds to seek to achieve strong
investment returns by maximizing the spread of investment income (net of
credit losses) earned on its real estate assets over the cost of financing
and hedging these assets. The Company will elect to be taxed as a real
estate investment trust ("REIT") under the Code. The Company generally
will not 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 day-to-day operations of the Company will be managed by BlackRock
Financial Management, Inc. (the "Manager") subject to the direction and
oversight of the Company's Board of Directors, which shall initially
consist of six members, four of whom will be unaffiliated with the Manager
and its affiliates. The Manager, a Delaware corporation, is a subsidiary
of PNC Bank. The Manager provides discretionary investment management
services for over $100 billion in assets, including over $15 billion of
multifamily, commercial and residential mortgage-backed securities and
provides non discretionary risk management advisory services for over $500
billion in mortgage assets and servicing on mortgage assets. See "The
Manager." The Company has elected to be externally managed by the Manager
to take advantage of the existing business relationships, operational and
risk management systems, expertise and economies of scale associated with
the Manager's current business operations.

INVESTMENT STRATEGY

The Company intends to purchase and originate multifamily, commercial
and residential term loans ("Mortgage Loans") and interests in multifamily
and commercial mortgage-backed securities ("CMBS"). The Company also may
invest in interests in residential mortgage-backed securities ("RMBS" and,
together with CMBS, "MBS"). The Company may hold its Mortgage Loans or
utilize them as collateral to create its own MBS.

Initially, one of the Company's primary investment focuses will be the
acquisition of non-investment grade CMBS such as the LB Commercial Trust,
Commercial Mortgage Pass-Through Certificates, Series 1998-C1 (the "Initial
Investment"). Non-Investment grade CMBS offer the potential of a higher
yield than relatively more senior classes of CMBS, but carry greater credit
and prepayment risk. The Company believes that a prudently managed
portfolio of non-investment grade CMBS can produce attractive returns in a
variety of interest rate environments, but no assurance can be given that
such returns can be achieved.

In order to invest the net proceeds of the Offering to provide current
returns, the Company intends to invest approximately % of the net
proceeds of the Offering in MBS Interests (the "Initial Investments")
described herein.

The Company will take an opportunistic approach to its investments
and, accordingly, the Company may invest in assets other than Mortgage
Loans and MBS. The Company may invest in or provide loans used to finance
construction ("Construction Loans"), loans secured by real property and
used as temporary financing ("Bridge Loans") and loans secured by junior
liens on real property ("Mezzanine Loans"). The Company may invest in
multifamily and commercial Mortgage Loans that are in default
("Nonperforming Mortgage Loans") or for which default is likely or imminent
or for which the borrower is making monthly payments in accordance with a
forbearance plan ("Subperforming Mortgage Loans" and, together with
Nonperforming Mortgage Loans and other distressed Mortgage Loans,
"Distressed Mortgage Loans").

The Company may also invest, for hedging and other purposes, in
derivative mortgage securities such as Interest Only ("IO") strips,
Principal Only ("PO") strips and other securities with significant exposure
to changes in mortgage prepayment rates. The Company may invest in
mortgage assets secured by real property located outside the United States.

The Company may invest in multifamily, commercial and other real
property, including Net Leased Real Estate, properties acquired at
foreclosure or by deed-in-lieu of foreclosure ("REO Property") and other
underperforming or otherwise distressed real property (all of such
underperforming and distressed real property, together with REO Property,
being referred to collectively as "Distressed Real Property"). The Company
expects that a portion of its mortgage assets will consist of mortgage-
based derivative securities and foreign MBS and Mortgage Loans. In
addition, the Company may invest in Real Property located outside the
United States. The Company may invest in registered investment companies,
partnerships and other investment funds and other types of non-mortgage
related assets and intends to engage in hedging transactions to reduce
interest rate, prepayment and currency exchange rate risks, subject to
restrictions imposed by the Code on a REIT or by the Company's exemption
from the Investment Company Act, as amended (the "Investment Company Act").

The Company will finance its assets with the net proceeds of this
offering (the "Offering"), future offerings of equity securities and
borrowings and expects that it will employ leverage consistent with the
type of assets acquired and the desired level of risk in various investment
environments, in general. The Company's governing documents do not
explicitly limit the amount of leverage that the Company may employ.
Instead, the amount of leverage to be employed will be left to the
discretion of the Manager, subject to periodic review by the Company's
Board of Directors. The Company will leverage its assets primarily with
reverse repurchase agreements, dollar rolls, securitizations of its
Mortgage Loans and secured and unsecured loans, including the issuance of
commercial paper. The Company also expects to issue preferred stock as a
source of longer term capital to finance asset growth.

The Company's policy is to acquire those mortgage assets which it
believes are likely to generate the highest returns on capital invested,
after considering the amount and nature of anticipated cash flows from the
asset, the credit risk of the borrower, the Company's ability to pledge the
asset to secure collateralized borrowings, the capital requirements
resulting from the purchase and financing of the asset, the potential for
appreciation and the costs of financing, hedging and managing the asset.
Prior to acquisition, potential returns on capital employed will be
assessed over the expected life of the asset and in a variety of interest
rate, yield spread, financing cost, credit loss and prepayment scenarios.
In managing the Company's portfolio, the Manager will establish stringent
credit standards and credit monitoring procedures and will also consider
balance sheet management and risk diversification issues. The Company will
employ proprietary risk management tools developed by the Manager to
continually monitor the risks of its assets and liabilities. Similar
proprietary tools will also help the Company manage its assets with the
goal of having its annual income determined in accordance with generally
accepted accounting principles equal or exceed its annual Taxable Income.
The Company also intends to minimize its Excess Inclusion Income. See
"Federal Income Tax Consequences." Except as set forth herein, the Company
has not yet established specific investment guidelines or standards, but
its investments will be made based on the Manager's assessment of
prevailing market conditions and the relative risks and returns available
at the time. An investor in the Common Stock offered hereby is therefore
subject to the risk that the Company's investment strategy will differ from
that which would be selected by such investor at any given time.

RELATIONSHIP WITH PNC

PNC Bank, a subsidiary of PNC and the 13th largest bank in the U.S.,
will enter into an agreement granting the Company, so long as the
Management Agreement (as hereinafter defined) with the Manager remains in
effect, a right of first offer to purchase not less than $1 billion
annually of multifamily and commercial Mortgage Loans typical of loans
originated by PNC Bank and which PNC Bank has determined to make available
for sale. The Mortgage Loans will be made available for purchase at fair
market value. In 1997 PNC originated approximately $5.8 billion, on a
gross basis, in commercial and multifamily loans through its network of 90
relationship officers and correspondent relationships. Although not
contractually committed to do so, the Company intends to purchase pools of
Mortgage Loans offered to it pursuant to the foregoing right of first
offer, provided such purchase would comply with the Company's investment
guidelines and underwriting criteria as established and modified from time
to time. The Company also expects in certain circumstances to commit to
purchase certain Mortgage Loans from PNC Bank prior to funding, enabling
PNC Bank to make loans which do not meet its retention criteria, while
providing the Company with an additional source of assets for acquisition.
The consideration for such purchases could, in some cases, consist of
securities of the Company. The Company believes that pools of PNC Bank's
Mortgage Loans will be appropriate investments for the Company given the
Company's investment strategy.

PNC Bank's Real Estate Line of Business provides credit for all
commercial and multifamily property types to middle market and
institutional clients throughout the U.S. including commercial and
residential developers, investors, mortgage brokers and property management
companies. Over 350 employees in 12 offices are focused into four
segments: Institutional, Regional, Affordable Housing and Warehouse
Lending. Also included within the business are Capital Markets units
devoted to Loan Syndications, Commercial Mortgage Backed Securitization and
Permanent Mortgages Placement. As of September 30, 1997, PNC Bank's Real
Estate Line of Business had commitments to the real estate industry
exceeding $8.5 billion. Originations, net of syndications, for the nine
months ended September 30, 1997 were in excess of $2.7 billion.

On January 28, 1998, PNC announced an agreement to acquire the assets
of Midland Loan Services, L.P. ("Midland"), headquartered in Kansas City,
Missouri. This transaction is expected to close in the second quarter of
1998. Midland specializes in commercial loan servicing and loan
origination. At December 31, 1997, Midland was the largest servicer of
CMBS in the United States, with a total servicing portfolio of
approximately $24 billion. In 1997, Midland originated approximately $1
billion in commercial and multi-family mortgage loans. Although no formal
agreement exists, if the acquisition by PNC occurs the Company anticipates
that Midland will service all or a portion of the commercial loans for
which the Company acquires servicing rights and that Midland will serve as
an additional source of assets to be acquired.

SUMMARY RISK FACTORS

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

O The Company and the Manager have common officers and common directors,
which may present conflicts of interest in the Company's dealings with
the Manager and its Affiliates, including the Company's purchase of
assets originated by such Affiliates. For example, the Company may
purchase certain mortgage assets from PNC Bank which owns 70% of the
outstanding capital stock of the Manager. Because PNC Bank will be
able to influence the affairs of the Manager there is a risk that PNC
Bank will be able to influence the investment decisions of the
Company.

O The Company was organized in November 1997, had no assets at December
31, 1997, has no operating history and there is no prior market for
the Common Stock and no established financing sources. Only
approximately $_____ million in purchase price of the Company's assets
have been identified and delays in investing the balance of the
proceeds of the Offering would result in reduced income. The Company
will face substantial competition in acquiring suitable investments,
which could increase their costs. Stockholders will not have the
opportunity to evaluate the manner in which the proceeds of the
Offering are to be invested and the economic merit of particular
assets to be acquired. The Manager will exercise significant
discretion in investing and allocating the proceeds of the Offering.
Assets to be purchased by the Company from PNC and Affiliates may in
some cases not have a readily determined fair market value. Depending
on the circumstances, the Company's investment guidelines approved by
the Board of Directors, may not require independent valuations.

O The Company is totally reliant on the Manager and the Manager has
never managed a REIT. There can be no assurance that the past
experience of the Manager will be sufficient to successfully manage
the business of the Company.

O The Company intends to acquire significant amounts of Mortgage Loans
and non-investment grade mortgage-backed securities, including IOs,
which are subject to greater risk of credit loss of principal and non-
payment of interest than investments in Mortgage Loans or senior
investment grade securities.

O The yield on the investments in Mortgage Loans and mortgage backed
securities, particularly IOs and POs, and thus the value of the
Company's Common Stock, will be sensitive to changes in prevailing
interest rates and changes in prepayment rates which may result in a
mismatch between the Company's borrowing rates and asset yields and
consequently reduce or eliminate net income from the Company's
investments.

O The Company's operations are expected to be highly leveraged and there
are no limitations on borrowings, which is likely to increase the
volatility of the Company's income and net asset value and could
result in operating or capital losses. The Company intends to
leverage its investments in an amount to be determined by the Manager
and, ultimately, the Board of Directors. If borrowing costs increase,
or if the cash flow generated by the Company's assets decreases, the
Company's use of leverage will increase the likelihood that the
Company will experience reduced or negative cash flow and reduced
liquidity.

O The Company intends to use hedging strategies that involve risk and
that may not be successful in insulating the Company from exposure to
changing interest and prepayment rates.

O The Company will be taxed as a regular corporation if it fails to
maintain its qualification as a REIT, which would reduce earnings and
cash available for distribution to stockholders.

O The Company's investment and operating policies and the strategies
that the Manager uses to implement these policies may be changed at
any time without the consent of stockholders.

O The Management Agreement provides for base management fees payable to
the Manager without consideration of the performance of the Company's
portfolio and also provides for incentive fees based on certain
performance criteria, which could result in the Manager recommending
riskier or more speculative investments. Termination of the
Management Agreement by the Manager could adversely affect the Company
if the Company were unable to find a suitable replacement.

O Termination of the Management Agreement by the Company may result in
the payment of a substantial termination fee which could adversely
affect the Company's financial condition.

O Stockholders will be subject to significant potential dilution from
future equity offerings, including offerings of preferred stock, which
may have an adverse effect on the market price of the Common Stock.

O The Company's activities, structure and operations may be adversely
affected by changes in the tax laws applicable to REITs.

O Failure to maintain an exemption from the Investment Company Act of
1940, would adversely affect results of operations.

O The Manager manages funds that are authorized to invest in certain of
the assets in which the Company may invest. There may be investment
opportunities that are favorable to each of the Company and certain
other funds managed by the Manager. In that case, the Manager will
allocate investment opportunities among the potential investors based
upon their primary investment objectives, applicable investment
restrictions, and such other factors as the Manager deems appropriate
and fair under the circumstances.

CREDIT RISK MANAGEMENT

The Company intends to manage the credit risk associated with its
investment portfolio by regularly monitoring the individual credit
exposures associated with its investment portfolio, diversifying its
portfolio of non-investment grade investments and maintaining a portion of
its assets in high quality investments. The Company will implement various
hedging strategies, primarily to protect itself from the effects of
interest rate fluctuations on its variable rate liabilities. However, no
hedging strategy will insulate the Company completely from such risks and
the Company's ability to enter into hedging transactions may be limited by
the Code and the transaction costs associated with entering into such
transactions.

INITIAL INVESTMENTS

The Company intends initially to invest approximately % of the net
proceeds of the Offering in the Initial Investments. See "Initial
Investments" on page and Appendix A hereto. The Board of Directors of
the Company, including all of the Unaffiliated Directors, are expected to
approve the Company's acquisition of the Initial Investments prior to the
sale of the Common Stock offered hereby. The MBS Interests to be acquired
at Closing are interests in CMBS backed by Mortgage Loans originated or
acquired by an affiliate of Lehman Brothers, one of the Underwriters of the
Offering. These MBS Interests include various subordinated classes issued
pursuant to the LB Commercial Mortgage Trust, Commercial Mortgage Pass-
Through Certificates, Series 1998-C1 transaction, expected to close in
March 1998. The MBS Interests are subordinated to $ in senior
securities as to losses in the $ loans underlying the securities.
Relevant portions of an offering memorandum related to the interests to be
acquired by the Company is attached hereto as Annex A.

THE MANAGER

GENERAL

The Manager is a subsidiary of PNC Bank N.A., which is a wholly owned
subsidiary of PNC Bank Corp. Established in 1988, the Manager is a
registered investment adviser under the Investment Advisers Act of 1940 and
is one of the largest fixed income investment management firms in the
United States. The Manager engages in investment and risk management as
its sole businesses and specializes in the management of domestic and
offshore fixed income assets for pension and profit sharing plans,
financial institutions such as banking and insurance companies and mutual
funds for retail and institutional investors.

The Manager has more than $100 billion in assets under management for
several mutual funds and institutional investors, including over $15
billion in commercial, multifamily and residential mortgage-backed
securities and provides non discretionary risk management advisory services
for over $500 billion in mortgage assets and servicing rights on mortgage
assets.

ORGANIZATION AND RELATIONSHIPS

The material relationships among the Company, its affiliates and the
Manager is depicted in the organization chart below.

[GRAPHIC BOX DELETED]

Anthracite Securitization Corp ("ASC"), a Delaware corporation, is a
taxable subsidiary of the Company. In order to comply with the REIT
provisions of the Code, the Company will own 100% of the non-voting common
stock and 5% of the voting common stock of ASC. The other 95% of the
voting common stock of ASC will be owned by [the Manager]. See "Federal
Income Tax Consequences Taxation of ASC," and " Proposed Tax Legislation."

The Company may from time to time form additional taxable subsidiaries
for purposes of carrying out its investment activities. See "Federal
Income Tax Consequences Proposed Tax Legislation for a discussion of
recent proposals which could affect the ability of the Company to obtain
the benefits of certain of such subsidiaries.

THE MANAGEMENT AGREEMENT

The Company will enter into the Management Agreement with the Manager
at the closing of the Offering.

The Manager will be responsible for the day-to-day operations of the
Company and will perform such services and activities relating to the assets
and operations of the Company as may be appropriate. The Manager will be
primarily involved in three activities: (i) underwriting, originating and
acquiring Mortgage Loans and other real estate related assets; (ii) asset/
liability and risk management, hedging of floating rate liabilities, and
financing, management and disposition of assets, including credit and
prepayment risk management; and (iii) 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 assets by the Company, arrange for
various types of financing and hedging strategies for the Company, monitor
the performance of the Company's assets and provide certain administrative
and managerial services in connection with the operation of the Company. At
all times, the Manager will be subject to the direction and oversight of the
Company's Board of Directors.

Except in the case of a termination by the Company for cause, upon
termination of the Management Agreement by the Company, the Company may be
obligated to pay the Manager a substantial termination fee, which may
adversely affect the Company's ability to terminate the Manager without
cause. Upon termination of the Management Agreement by the Company, the
Company is obligated to pay the Manager what could be a substantial
termination fee, which will be determined by independent appraisal (other
than in the case of termination by the Company for cause). The Company may
terminate, or decline to renew the term of, the Management Agreement
without cause at any time after the first two years upon 60 days written
notice by a majority vote of the Unaffiliated Directors; provided that the
Company shall pay the Manager a termination fee determined by independent
appraisal. Such appraisal is to be conducted by a nationally-recognized
appraisal firm mutually agreed upon by the Company and the Manager. If the
Company and the Manager are unable to agree upon an appraisal firm, then
each of the Company and the Manager is to choose an independent appraisal
firm to conduct an appraisal. In such event, (i) if the appraisals
prepared by the two appraisers so selected are the same or differ by an
amount that does not exceed 20% of the higher of the two appraisals, the
termination fee is to be deemed to be the average of the appraisals as
prepared by each party's chosen appraiser, and (ii) if the two appraisals
differ by more than 20% of such higher amount, the two appraisers together
are to select a third appraisal firm to conduct an appraisal. If the two
appraisers are unable to agree as to the identity of such third appraiser,
either of the Manager and the Company may request that the American
Arbitration Association ("AAA") select the third appraiser. The
termination fee then is to be an amount determined by such third appraiser,
but in no event less than the lower of the two initial appraisals or more
than the higher of such two initial appraisals.

In addition, the Company has the right at any time during the term of
the Management Agreement to terminate the Management Agreement without the
payment of any termination fee upon, among other things, a material breach
by the Manager of any provision contained in the Management Agreement that
remains uncured at the end of the applicable cure period (including the
failure of the Manager to use reasonable efforts to comply with the
Company's investment policy and guidelines).

MANAGEMENT COMPENSATION

The following table presents all compensation, fees and other benefits
(including reimbursement of out-of-pocket expenses) that the Manager may
earn or receive under the terms of the Management Agreement.

RECIPIENT PAYOR AMOUNT

Manager Company Base management fee equal to a percentage of the
Average Invested Assets by rating category of the
Company (1)

Manager Company Incentive compensation based on the amount, if
any, by which the Company's Funds From Operations
and certain net gains exceed a hurdle rate(2)

Manager Company Out-of-pocket expenses of Manager paid to third
parties in connection with due diligence (3)

(1) The base management fee is equal to 1% per annum of Average Invested
Assets rated less than BB- or not rated, 0.75% of Average Invested
Assets rated BB- to BB+, and 0.5% of Average Invested Assets rated
above BB+.

(2) For a detailed explanation of the calculation of the incentive
compensation payable to the Manager, see "The Manager - Management
Compensation."

(3) The Manager may engage PNC, Midland or unaffiliated third parties to
conduct due diligence with respect to potential portfolio investments.
Accordingly, a portion of the out-of-pocket expenses will be paid to
PNC or Midland in such capacities. The Company's guidelines will
require the contract for such engagement will be conducted at arm's
length, as evidenced by documentation provided by the Manager. PNC
and Midland will be paid fees and out-of-pocket expenses as would
customarily be paid to unaffiliated third parties for such services.

The Manager will be entitled to receive incentive compensation for
each fiscal quarter in an amount equal to the product of (A) 25% of the
dollar amount by which (1)(a) Funds From Operations of the Company (before
the incentive fee) per share of Common Stock (based on the weighted average
number of shares outstanding) plus (b) gains (or minus loses) from debt
restructuring and sales of property per share of Common Stock (based on the
weighted average number of shares outstanding), exceed (2) an amount equal
to (a) the weighted average of the price per share of the initial offering
and the prices per share of any secondary offerings by the Company
multiplied by (b) the Ten-Year U.S. Treasury Rate plus three percent per
annum (expressed as a quarterly percentage) multiplied by (B) the weighted
average number of shares of Common Stock outstanding during such quarter.
Notwithstanding the foregoing, accrual and payment of any portion of the
incentive compensation that is attributable to net capital gains of the
Company will be delayed to the extent, if any, required by the Investment
Advisers Act of 1940 as in effect at that time. "Funds From Operations" as
defined by the National Association of Real Estate Investment Trusts
("NAREIT") means net income (computed in accordance with generally accepted
accounting principles ("GAAP") excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on
real estate assets, and after adjustments for unconsolidated partnerships
and joint ventures. Funds From Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity or ability
to make distributions. As used in calculating the Manager's compensation,
the term "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 constant maturities 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. See "The Manager Management Compensation" for a more detailed
explanation of the management compensation arrangements.

CONFLICTS OF INTEREST OF THE MANAGER

The Company is subject to conflicts of interest involving the Manager
and its Affiliates because, among other reasons, (i) the Manager and its
Affiliates are permitted to purchase mortgage assets for their own account
and to advise accounts of other clients, and many investments appropriate
for the Company also will be appropriate for these accounts, (ii) the
incentive fee, which is based on income of the Company, may create an
incentive for the Manager to recommend investments with greater income
potential, which generally are riskier or more speculative, than would be
the case if its fee did not include a "performance" component and (iii) the
executive officers and certain of the directors of the Company will be
directors, officers and employees of the Manager.

The Company is also subject to conflicts of interest because of the
expected purchase of substantial assets from PNC and its Affiliates. Many
of such assets do not have a readily determinable fair market value and
independent valuations may not be sought. Nevertheless, the Company
intends to adopt operating policies to minimize the effect of such
conflicts. These policies will require that any acquisition of assets from
PNC or its Affiliates be made for fair market value. The Unaffiliated
Directors will adopt a policy requiring documentation of the fair market
value of all affiliated purchases. The policy will require the reporting
of all such documentation quarterly. In addition, the Board of Directors
intends to approve certain operating and investing guidelines which may be
amended from time to time. The Unaffiliated Directors are likely to rely
substantially on information and analysis provided by the Manager.

TAX STATUS OF THE COMPANY

The Company intends to qualify and will elect to be taxed as a REIT
under the REIT Provisions of the Code commencing with its taxable year
ending December 31, 1998. Provided the Company qualifies as a REIT, the
Company generally will not be subject to federal corporate income tax on
taxable income that is distributed to its stockholders. REITs are subject
to a number of organizational and operational requirements, including a
requirement that they currently distribute at least 95% of their annual
Taxable Income. Although the Company does not intend to request a ruling
from the Internal Revenue Service (the "IRS") as to its REIT status, the
Company will receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP
with respect to the qualification of the Company as a REIT, which opinion
is based on certain assumptions and representations about the Company's
ongoing businesses and investment activities and other matters. No
assurance can be given that the Company will be able to comply with such
assumptions and representations in the future. Furthermore, such opinion
is not binding on the IRS or any court. Failure to qualify as a REIT would
render the Company subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates
and distributions to its stockholders would not be deductible. Even if the
Company qualifies for taxation as a REIT, the Company may be subject to
certain federal, state, local and foreign taxes on its income and property.
In connection with the Company's election to be taxed as a REIT, the
Company's Articles of Incorporation impose restrictions on the transfer and
ownership of its stock. See "Risk Factors Failure to Maintain REIT
Status would have Adverse Tax Consequences," "Federal Income Tax
Consequences Taxation of the Company" and "Description of Capital Stock
Repurchase of Shares and Restrictions on Transfer."

CERTAIN BENEFITS TO RELATED PARTIES

The Company will authorize the issuance of options to purchase 10% of
the outstanding shares of Common Stock and will grant to the Manager, as of
the initial public offering, options to purchase an aggregate of ________
shares of Common Stock (which the Manager will allocate to its directors,
officers and employees) at an exercise price equal to the initial public
offering price. See "The Manager Stock Options and Other Awards" and
"Management of the Company Stock Options Plan."

PNC has agreed that it will purchase from the Company, at a price
equal to the initial public offering price less the underwriting discount,
a number of shares of Common Stock of the Company such that the shares
owned by it will constitute 3% of the shares of the Company's Common Stock
then outstanding. In addition, FBR Asset Investment Corporation, an
affiliate of Friedman, Billings, Ramsey and Co., one of the Representatives
of the Underwriters, has agreed to acquire $10 million of Common Stock in a
private placement that will close concurrently with this Offering at the
initial public offering price, net of underwriting discounts and
commissions. FBR Asset Investment Corporation will have certain "demand"
and "piggy-back" registration rights with respect to the Common Stock.

Registration Rights. The Company has granted certain "demand" and
"piggyback" registration rights to FBR Asset Investment Corporation and PNC
with respect to the Common Stock acquired by them in the Offering. Subject
to certain conditions, the demand registration rights permit holders of
such shares to request one demand registration. Subject to certain
conditions, the piggyback registration rights permit the holders of such
shares to include their Common Stock in the registration by the Company of
its equity securities other than in connection with the registration by the
company under the Securities Act of any of its securities, (i) in
connection with any corporate reorganization, or (ii) in connection with an
employee benefit plan. FBR Asset Investment Corporation may not offer,
pledge, sell, dispose of or otherwise transfer the Common Stock acquired in
the Offering for a period of 90 days following the closing of the Offering.

The Company will enter into the Management Agreement with the Manager
pursuant to which the Manager will be entitled to receive an annual base
management fee, a quarterly incentive fee and a termination fee in the
event of termination without cause or nonrenewal. Certain officers and
directors of the Manager are also officers and directors of the Company.
Mr. Larry Fink, the Chairman of the Board and Chief Executive Officer of
the Manager, is also the Chairman of the Board of the Company. Hugh R.
Frater, a Managing Director of the Manager, is also President and Chief
Executive Officer of the Company. Richard Shea, a Director of the Manager,
is the Chief Operating Officer of the Company. Edwin O. Bergman, a Vice
President of the Manager, is also a Vice President of the Company. Chris
A. Milner, a Vice President of the Manager is also a Vice President of the
Company. Mark S. Warner, a Director of the Manager, is a Vice President of
the Company. Susan L. Wagner, a Managing Director of the Manager, is
Secretary of the Company. See "The Manager The Management Agreement."

INDUSTRY TRENDS

Management believes fundamental changes are occurring in the U.S.
mortgage market, resulting in the shift of investment capital and mortgage
assets out of traditional lending and savings institutions and into the
development and growth of new forms of mortgage banking and mortgage
investment firms, including those that qualify as REITs under the Code.
Management believes that traditional mortgage investment companies, such as
banks, thrifts and insurance companies, provide less attractive investment
structures for investing in mortgage assets because of the costs associated
with regulation, infrastructure, and corporate level taxation.
Additionally, with the development of highly competitive national mortgage
markets (which the Company believes is partly due to the expansion of
government sponsored enterprises such as GNMA, FNMA and FHLMC), local and
regional mortgage originators have lost market share to more efficient
mortgage originators who compete nationally. The growth of the secondary
mortgage market, including new securitization techniques, has also 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
allowing the Company to pay higher dividends than institutions with similar
investments that are subject to federal income tax on their earnings. In
addition, recent changes to federal tax laws provide REITs with greater
flexibility to manage and hedge their floating rate liabilities. See
"Federal Income Tax Consequences Taxation of the Company."

The U.S. residential and commercial mortgage markets have experienced
considerable growth over the past 15 years with total U.S. 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, and total U.S. commercial mortgage debt
outstanding growing from approximately $955 billion in 1993 to
approximately $1.06 trillion in 1996, according to The Federal Reserve. In
addition, according to the same sources, the total amount of U.S.
residential mortgage debt securitized into MBS has grown from approximately
$110 billion in 1980 to approximately $1.9 trillion in 1996, and the total
amount of U.S. commercial MBS outstanding has grown from approximately
$34.2 billion in 1993 to approximately $97.2 billion in 1996.

Foreign mortgage loan and securitization markets have also grown
rapidly in recent years. For example, in Europe, commercial and
residential Mortgage Loans outstanding have grown by over $200 billion
since 1993, to approximately $1.6 trillion in 1996. This global growth of
the supply and demand for mortgage capital is expected to continue and the
REIT investment structure is expected to be the most efficient vehicle for
financing such growth.

DIVIDEND POLICY AND DISTRIBUTIONS

To avoid corporate income and excise tax and to maintain its
qualification as a REIT, the Company intends to make annual distributions
to its stockholders of at least 95% of the Company's Taxable Income (which
does not necessarily equal net income as calculated in accordance with
GAAP), determined without regard to the deduction for dividends paid and by
excluding any net capital gains. The foregoing 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 OFFERING

Common Stock Offered . . . . . . . __________ shares(1)

Common Stock to be Outstanding
after the offering . . . . . . . . __________ shares(1)(2)
Use of Proceeds . . . . . . . . . . Purchase of the Company's initial
portfolio of mortgage and other
assets. See "Initial Investments."
The Company intends to temporarily
invest the balance of the proceeds
of the Offering in readily
marketable interest bearing assets
consistent with its intention to
qualify as a REIT until appropriate
real estate assets are identified
and acquired. Pending full
investment in the desired mix of
assets, funds will be committed to
short-term investments:

Proposed NYSE Symbol . . . . . . . " "

_______________

(1) Assumes that the Underwriters' option to purchase up to an additional
_________ shares to cover over-allotments will not be exercised. See
"Underwriting."

(2) Excludes _________ shares of Common Stock reserved for issuance under
the Company's 1998 Stock Option Plan. Options to acquire _____ shares
of Common Stock will be granted to the Manager and Unaffiliated
Directors of the Company. See "Management of the Company Stock
Options."

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 its investment. While the Company will
strive to attain its objectives through, among other things, the Manager's
research and portfolio management skills, there is no guarantee of
successful performance, that such objectives can be reached or that a
positive return can be achieved. In addition to the information set forth
elsewhere in this Prospectus, the following risk factors should be
considered.

CONFLICTS OF INTEREST OF THE MANAGER MAY RESULT IN DECISIONS THAT DO
NOT FULLY REFLECT STOCKHOLDERS' BEST INTERESTS. The Company is subject to
conflicts of interest involving the Manager. The executive officers and
certain of the directors of the Company will be directors, officers and
employees of the Manager. A majority of the Board of Directors will consist
of Unaffiliated Directors, but the initial Unaffiliated Directors will be
selected by the Manager.

The Company expects to acquire mortgage assets, including subordinate
interests, from the Manager's Affiliates and will have a right of first
offer to purchase up to $1 billion annually in multifamily and commercial
Mortgage Loans originated by PNC Bank and which PNC Bank has determined to
make available for distribution. The Mortgage Loans will be made available
for purchase at fair market value. Certain of such purchases could involve
the issuance of equity securities of the Company. In addition, the Company
expects to acquire other mortgage assets, including subordinated interests,
from the Manager's Affiliates, and the Company may, but has no current
plans to, invest as a co-participant with Affiliates of the Manager in
loans originated or acquired by such Affiliates. Although such investments
will be subject to review by Unaffiliated Directors, it is anticipated that
the Unaffiliated Directors will rely primarily on information provided by
the Manager. Because the Manager is a majority-owned subsidiary of PNC
Bank, there is a risk that PNC Bank will be able to exert influence over
these investment decisions. Although the Company anticipates purchasing
various mortgage assets from the Affiliates of the Manager from time to
time, other than the right of first offer to PNC loans, the Manager and its
Affiliates will have no obligation to make any particular investment
opportunities available to the Company.

The Manager has informed the Company that it expects to continue to
purchase and manage mortgage assets and other real estate related assets in
the future for third-party accounts. The Manager and its Affiliates
currently provide investment services to more than 200 accounts with assets
of more than $[100] billion for which assets suitable for the Company could
also be appropriate. The Manager provides services to other REITs not
affiliated with the Company.

As a result, there may be a conflict of interest between the
operations of the Manager and its Affiliates in the acquisition and
disposition of mortgage assets. In addition, the Manager and its
Affiliates may from time to time purchase mortgage assets for their own
account and may purchase or sell assets from or to the Company. Such
conflicts may result in decisions and/or allocations of mortgage assets by
the Manager that are not in the best interests of the Company although the
Manager seeks to allocate investment opportunities in a fair manner among
accounts for which particular opportunities are suitable and to achieve the
most favorable price in all transactions.

Although the Company has adopted investment guidelines, those
guidelines give the Manager significant discretion in investing the
proceeds of the Offering. Moreover, in the future, the Board of Directors
may change the investment guidelines without the consent of the
shareholders.

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 25% of the Funds
From Operations of the Company (before payment of such incentive
compensation) plus gains (or minus losses) from certain transactions in
excess of the amount that would produce an annualized return on invested
common stock capital equal to the Ten-Year U.S. Treasury Rate plus 3%
expressed as a quarterly rate. In evaluating mortgage assets for
investment and in other management strategies, the opportunity to earn a
performance fee based on net income may lead the Manager to place 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, which could result in increased risk to the value of the
Company's portfolio.

The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or Affiliates to
engage in any business or render services of any kind to any other person,
including other REITs. The ability of the Manager and its employees to
engage in other business activities could reduce the time and effort spent
on the management of the Company.

NO OPERATING HISTORY; NO IDENTIFIED ASSETS; NO ESTABLISHED FINANCING;
NO PRIOR MARKET FOR COMMON STOCK. The Company was organized in November
1997, has no assets at the date hereof, has no operating history and will
commence operations only if the shares of Common Stock offered hereby are
sold. No prior market exists for the Common Stock of the Company. The
results of the Company's operations will depend on many factors, including
the availability of opportunities for the acquisition of assets, the level
and volatility of interest rates, readily accessible short and long term
funding alternative conditions in the financial markets and economic
conditions. The Company will face substantial competition in acquiring
suitable investments, which could increase its costs. Moreover, delays in
investing the proceeds of the offering would result in reduced income to
the Company. Stockholders will not have the opportunity to evaluate the
manner in which the proceeds are to be invested and the economic merit of
particular assets to be acquired. The Company has not established any
lines of credit or collateralized financing and, if such financing is
available, there is no assurance that it will be available on favorable
terms. Furthermore, no assurance can be given that the Company will be
able to successfully operate its business as described in this Prospectus.

DEPENDENCE ON THE MANAGER; TERMINATION OF MANAGEMENT AGREEMENT. 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 the officers and employees of the Manager, primarily
those named under "Management" elsewhere herein. 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. The Manager in turn is dependent on the efforts of
senior management personnel. While the Company believes that the Manager
could find replacements for its key executives, the loss of their services
could have an adverse effect on the operations of the Manager and the
Company.

The Manager has no experience in managing a REIT. There can be no
assurance that the past experience of the Manager will be sufficient to
successfully manage the business of the Company. Further, the past
performance of the Manager is not indicative of future results of the
Company.

The Company may terminate the Management Agreement at any time upon
60 days' written notice to the other party. The Company will be obligated
to pay the Manager a substantial termination fee in the event the Company
terminates the Management Agreement, except in the case of a termination
for cause. Payment of this termination fee could have an adverse effect on
the Company's financial condition, cash flows and results of operations
and would reduce the amount of funds available for distribution to
Stockholders.

INTEREST RATE FLUCTUATIONS WILL AFFECT VALUE OF MORTGAGE ASSETS, NET
INCOME AND COMMON STOCK.

General. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors
beyond the control of the Company. Interest rate fluctuations can
adversely affect the income and value of the Company's Common Stock in many
ways and present a variety of risks, including the risk of a mismatch
between asset yields and borrowing rates, variances in the yield curve and
changing prepayment rates.

Interest Rate Mismatch Could Occur Between Asset Yields and Borrowing
Rates Resulting in Decreased Yield. The Company's operating results will
depend in a large part on differences between the income from its assets
(net of credit losses) and its borrowing costs. The Company intends to
fund a substantial portion of its assets with borrowings having interest
rates that reset relatively rapidly, such as monthly or quarterly. The
Company anticipates that, in most cases, the income from its assets will
respond more slowly to interest rate fluctuations than the cost of its
borrowings, creating a potential mismatch between asset yields and
borrowing rates. Consequently, changes in interest rates, particularly
short-term interest rates, may significantly influence the Company's net
income. Increases in these rates will tend to decrease the Company's net
income and market value of the Company's net assets. Interest rate
fluctuations resulting in the Company's interest expense exceeding interest
income would result in the Company incurring operating losses.

Inverted Yield Curve Adversely Affects Income. The relationship
between short-term and long-term interest rates is often referred to as the
"yield curve." Ordinarily, short-term interest rates are lower than long-
term interest rates. If short-term interest rates rise disproportionately
relative to long-term interest rates (a flattening of the yield curve), the
borrowing costs of the Company may increase more rapidly than the interest
income earned on its assets. Because the Company's borrowings will
primarily bear interest at short-term rates and its assets will primarily
bear interest at medium-term to long-term rates, a flattening of the yield
curve will tend to decrease the Company's net income and market value of
its net assets. Additionally, to the extent cash flows from long-term
assets that return scheduled and unscheduled principal are reinvested, the
spread between the yields of the new assets and available borrowing rates
may decline and also may tend to decrease the net income and market value
of the Company's net assets. It is also possible that short-term interest
rates may adjust relative to long-term interest rates such that the level
of short-term rates exceeds the level of long-term rates (a yield curve
inversion). In this case, borrowing costs may exceed the interest income
and operating losses could be incurred.

Ownership of Non-Investment Grade Mortgage Assets Subject To Increased
Risk of Loss. The Company intends to acquire a significant amount of non-
investment grade mortgage assets, including unrated "first loss" credit
support subordinated interests. A first loss security is the most
subordinated class in a structure and accordingly is the first to bear the
loss upon a default on, restructuring or liquidation of the underlying
collateral and the last to receive payment of interest and principal. Such
classes are subject to special risks, including a substantially greater
risk of loss of principal and non-payment of interest than more senior,
rated classes. The market values of subordinated interests tend to be more
sensitive to changes in economic conditions and less sensitive to changes
than more senior, rated classes. As a result of these and other factors,
subordinate interests generally are not actively traded and may not provide
holders thereof with liquidity of investment.

The yield to maturity on subordinated interests of the type the
Company intends to acquire will be extremely sensitive to the default and
loss experience of the underlying mortgage loans and the timing of any such
defaults or losses. Because the subordinate interests of the type the
Company intends to acquire generally have no credit support, to the extent
there are realized losses on the mortgage loans, the Company may not
recover the full amount or, in extreme cases, any of its initial investment
in such subordinate interests.

When the Company acquires a subordinated MBS, it typically will be
unable to obtain the right to service the underlying performing mortgage
loans (the "Mortgage Collateral"). To minimize its losses, the Company
will seek to obtain the rights to service the underlying Mortgage
Collateral in default (the servicing of defaulted mortgage loans is
referred to as "Special Servicing"), although in many cases it will not be
able to obtain Special Servicing rights on acceptable terms. If the
Company does acquire Special Servicing rights, then it will contract with a
third-party special servicer, such as PNC or Midland, to perform the
Special Servicing functions, and thus the performance of the Company's
investments will be dependent upon such third party's performance. If PNC
or the Manger is hired then the Manager will endeavor to ensure that the
contract provide a market price and evidence of its analysis in this regard
will be to the Board at the next quarterly Board meeting. To the extent the
Company does not obtain Special Servicing rights with respect to the
Mortgage Collateral underlying its MBS, the servicer of the Mortgage
Collateral generally would be responsible to holders of the senior classes
of MBS, whose interests may not be the same as those of the holders o the
subordinated classes. Accordingly, the Mortgage Collateral may not be
serviced in a manner that is most advantageous to the Company as the holder
of a subordinated class.

Prepayment Rates Can Increase, Thus Adversely Affecting Yields. The
value of mortgage assets may be affected substantially by prepayment rates
on the related Mortgage Loans. Prepayment rates on mortgage assets are
influenced by changes in current interest rates and a variety of economic,
geographic and other factors beyond the control of the Company and cannot
be predicted with certainty. In periods of declining mortgage interest
rates, prepayments on mortgage assets generally increase. If general
interest rates decline as well, the proceeds of such prepayments received
during such periods are likely to be reinvested by the Company in assets
yielding less than the yields on the mortgage assets that were prepaid. In
addition, the market value of the mortgage assets may, because of the risk
of prepayment, benefit less than other fixed-income securities from
declining interest rates. Conversely, in periods of rising interest rates,
prepayments on mortgage assets generally decrease, in which case the
Company would not have the prepayment proceeds available to invest in
assets with higher yields. Under certain interest rate and prepayment
scenarios the Company may fail to recoup fully its cost of acquisition of
certain investments.

The Company may acquire classes of mortgage assets that are entitled
to no (or only nominal) payments of principal, but only to payments of
interest, such as IOs. The yield to maturity of IOs is very sensitive to
the rate of prepayments on the underlying mortgage loans. If the rate of
prepayments is faster than anticipated, the yield on IOs will be negatively
affected, and, in extreme cases, the initial investment amount may not be
recovered and the IO investment could become worthless. Some IOs bear
interest at a floating rate that varies inversely with (and often at a
multiple of) changes in a specified interest rate index ("Inverse IOs").
Therefore, the yield to maturity of an Inverse IO is extremely sensitive to
changes in the related index. The Company also expects to invest in
subordinated IOs ("Sub IOs"). Interest amounts otherwise allocable to Sub
IOs generally are used to make payments on more senior classes or to fund a
reserve account for the protection of senior classes until over
collateralization occurs or the balance in the reserve account reaches a
specified level. The yield to maturity of Sub IOs is very sensitive not
only to default losses but also to the rate and timing of prepayment on the
underlying loans. Under certain interest rate and prepayment scenarios,
the Company may fail to recoup fully the cost of acquiring IOs, Inverse IOs
and Sub IOs.

RISK OF LOSS ON MORTGAGE LOANS. The Company intends to acquire,
accumulate and securitize Mortgage Loans as part of its investment
strategy. While holding Mortgage Loans, the Company will be subject to
risks of borrower defaults, bankruptcies, fraud and losses and special
hazard losses that are not covered by standard hazard insurance. Also, the
costs of financing and hedging the Mortgage Loans could exceed the interest
income on the Mortgage Loans. 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. It may not be
possible or economical for the Company to securitize all of the mortgage
loans which it acquires, in which case the Company will continue to hold
the mortgage loans and bear the risks of borrower defaults, bankruptcies,
fraud losses and special hazard losses. Furthermore, the Company would
expect to retain a subordinate interest in securitizations of such mortgage
loans, in which case it would retain substantially all of these risks in a
more concentrated form up to the amount of its subordinated interest.

Multifamily and Commercial Loans Involve a Greater Risk of Loss than
Single Family Loans. Multifamily and commercial real estate lending is
considered to involve a higher degree of risk than single family
residential lending because of a variety of factors, including generally
larger loan balances, dependency for repayment on successful operation of
the mortgaged property and tenant businesses operating therein, and loan
terms that include amortization schedules longer than the stated maturity
which provide for balloon payments at stated maturity rather than periodic
principal payments. In addition, the value of multifamily and commercial
real estate can be affected significantly by the supply and demand in the
market for that type of property.

Limited Recourse Loans May Limit the Company's Recovery to the Value
of the Mortgaged Property. The Company anticipates that a substantial
portion of the Mortgage Loans that it will acquire may contain limitations
on the mortgagee's recourse against the borrower. In other cases, the
mortgagee's recourse against the borrower may be limited by applicable
provisions of the laws of the jurisdictions in which the Mortgaged
Properties are located or by the mortgagee's's selection of remedies and
the impact of those laws on that selection. In those cases, in the event
of a borrower default, recourse may be limited to only the specific
Mortgaged Property and other assets, if any, pledged to secure the relevant
Mortgage Loan. As to those Mortgage Loans that provide for recourse
against the borrower and its assets generally, there can be no assurance
that such recourse will provide a recovery in respect of a defaulted
Mortgage Loan greater than the liquidation value of the Mortgaged Property
securing that Mortgage Loan.

Volatility of Values of Mortgaged Properties May Affect Adversely the
Company's Mortgage Loans. Commercial and multifamily property values and
net operating income derived therefrom are subject to volatility and may be
affected adversely by a number of factors, including, but not limited to,
national, regional and local economic conditions (which may be adversely
affected by plant closings, industry slowdowns and other factors); local
real estate conditions (such as an oversupply of housing, retail,
industrial, office or other commercial space); changes or continued
weakness in specific industry segments; perceptions by prospective tenants,
retailers and shoppers of the safety, convenience, services and
attractiveness of the property; the willingness and ability of the
property's owner to provide capable management and adequate maintenance;
construction quality, age and design; demographic factors; retroactive
changes to building or similar codes; and increases in operating expenses
(such as energy costs).

Construction, Bridge and Mezzanine Loans Involve Greater Risks of Loss
than Loans Secured by Income Producing Properties. The Company may acquire
Construction Loans, Bridge Loans and Mezzanine Loans. These types of
Mortgage Loans are considered to involve a higher degree of risk than long-
term senior mortgage lending secured by income-producing real property.
This is because of a variety of factors, including, in the case of
Construction Loans, dependency on successful completion and operation of
the project for repayment, difficulties in estimating construction or
rehabilitation costs and loan terms that often require little or no
amortization, providing instead for additional advances to be made and for
a balloon payment at a stated maturity date. In the case of Mezzanine
Loans, the factors would include, among other things, that a foreclosure by
the holder of the senior loan could result in a Mezzanine Loan becoming
unsecured. Accordingly, the Company may not recover some or all of its
investment in such Mezzanine Loan. In addition, Construction Loans, Bridge
Loans and Mezzanine Loans may have higher loan to value ratios than
conventional Mortgage Loans because of shared appreciation provisions.

Distressed Mortgage Loans May Have Greater Default Risks than
Performing Loans. The Company may acquire Nonperfoming and Subperforming
Mortgage Loans, as well as Mortgage Loans that have had a history of
delinquencies. These Mortgage Loans presently may be in default or may
have a greater than normal risk of future defaults and delinquencies, as
compared to newly originated, high quality loans. Returns on an investment
of this type depend on the borrower's ability to make required payments or,
in the event of default, the ability of the loan's servicer to foreclose
and liquidate the mortgaged property underlying the Mortgage Loan. There
can be no assurance that the servicer can liquidate a defaulted Mortgage
Loan successfully or in a timely fashion.

Foreign Real Properties are Subject to Currency Conversion Risks,
Foreign Tax Laws and Uncertainty of Foreign Laws. The Company may invest
in Real Property, or Mortgage Loans secured by Real Property, located
outside the United States. Investing in Real Property located in foreign
countries creates risks associated with the uncertainty of foreign laws and
markets. Moreover, investments in foreign assets may be subject to
currency conversion risks. In addition, income from investment in foreign
Real Property and, in some instances, foreign Mortgage Loans may be subject
to tax by foreign jurisdictions, which would reduce the economic benefit of
such investments. The Manager has limited experience in investing in
foreign Real Property.

Risks Related to Investments in Real Property. Distressed Real
Properties may have significant amounts of unleased space and thus may not
generate revenues sufficient to pay operating expenses and meet debt
service obligations. The value of the Company's investments in real
property and the Company's income and ability to make distributions to its
stockholders will be dependent upon the ability of the Manager to hire and
supervise capable property managers to operate the real property in a
manner that maintains or increases revenues in excess of operating expenses
and debt service. Revenues from real property may be affected adversely by
changes in national or local economic conditions, competition from other
properties offering the same or similar attributes, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact
of present or future environmental legislation and compliance with
environmental laws, the ongoing need for capital improvements (particularly
in older structures), changes in real estate tax rates and other operating
expenses, adverse changes in governmental rules and fiscal policies, civil
unrest, acts of God, including earthquakes, hurricanes and other natural
disasters (which may result in uninsured or underinsured losses), acts of
war, adverse changes in zoning laws, and other factors which will be beyond
the control of the Company.

Although the Company's insurance will not cover all losses, the
Company intends to maintain comprehensive casualty insurance on its real
property, including liability and fire and extended coverage, in amounts
sufficient to permit replacement in the event of a total loss, subject to
applicable deductibles. The Company will endeavor to obtain coverage of
the type and in the amount customarily obtained by owners of properties
similar to its real property. There are certain types of losses, however,
generally of a catastrophic nature, such as earthquakes, floods and
hurricanes, that may be uninsurable or not economically insurable.
Inflation, changes in building codes and ordinances, environmental
considerations, provisions in loan documents encumbering properties that
have been pledged as collateral security for loans, and other factors also
might make it economically impractical to use insurance proceeds to replace
a property if it is damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company, if any, might not be adequate
to restore the Company's investment with respect to the affected property.

All real property owned by the Company will be subject to real
property taxes and, in some instances, personal property taxes. Such real
and personal property taxes may increase or decrease as property tax rates
change and as the properties are assessed or reassessed by taxing
authorities. An increase in property taxes on the Company's real property
could affect adversely the Company's income and ability to make
distributions to its stockholders and could decrease the value of that real
property.

Reverse Repurchase Agreements and Dollar Roll Agreements. Reverse
repurchase agreements involve sales by the Company of portfolio assets,
concurrently with an agreement by the Company to repurchase such assets at
a later date at a fixed price. During the reverse repurchase agreement
period, the Company continues to receive principal and interest payments on
such portfolio assets and also has the opportunity to earn a return on the
collateral furnished by the counterparty to secure its obligation to
redeliver the securities.

Dollar rolls are transactions in which the Company sells securities
for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type of coupon) securities on a
specified future date. During the roll period, the Company forgoes
principal and interest paid on the securities. The Company is compensated
by the difference between the current sales price and the forward price for
the future purchase (often referred to as the "drop") as well as by the
interest earned on the cash proceeds of the initial sale.

Reverse repurchase agreements and dollar rolls involve the risk that
the market value of the securities retained by the Company may decline
below the price of the securities the Company has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under
a reverse repurchase agreement or dollar roll files for bankruptcy or
becomes insolvent, the Company's use of the proceeds of the agreement may
be restricted pending a determination by the other party or its trustee or
receiver whether to enforce the Company's obligation to repurchase the
securities.

LEVERAGE INCREASES EXPOSURE TO LOSS. The Company expects to employ
leverage consistent with the type of assets acquired and the desired level
of interest rate risk in various investment environments. The Company's
Charter and Bylaws do not limit the amount of indebtedness the Company may
incur. Instead, the amount of leverage to be employed will be left to the
discretion of the Manager, subject to periodic review by the Company's
Board of Directors. The Company will leverage its assets primarily with
reverse repurchase agreements, dollar rolls, securitizations of its
Mortgage Loans and secured and unsecured loans, including the issuance of
commercial paper. The terms of such borrowings may provide for the Company
to pay a fixed or adjustable rate of interest, and may provide for any term
to maturity that the Company deems appropriate.

Leverage can reduce the net income available for distributions to
stockholders. If the interest income on the assets purchased with borrowed
funds fails to cover the cost of the borrowings, the Company will
experience net interest losses and may experience net losses and erosion or
elimination of its equity.

The ability of the Company to achieve its investment objectives
depends to a significant extent on its ability to borrow money in
sufficient amounts and on sufficiently favorable terms to earn incremental
returns. The Company may not be able to achieve the degree of leverage it
believes to be optimal due to decreases in the proportion of the value of
its assets that it can borrow against, decreases in the market value of the
Company's assets, increases in interest rates, changes in the availability
of financing in the market, conditions then applicable in the lending
market and other factors. This may cause the Company to experience losses
or less profits than would otherwise be the case.

A substantial portion of the Company's borrowings are expected to be
in the form of collateralized borrowings. If the value of the assets
pledged to secure such borrowings were to decline, the Company would be
required to post additional collateral, to reduce the amount borrowed or
suffer forced sales of the collateral. If sales were made at prices lower
than the carrying value of the collateral, the Company would experience
additional losses. If the Company is forced to liquidate Qualified REIT
Real Estate Assets to repay borrowings, there can be no assurance that it
will be able to maintain compliance with the REIT provisions of the Code
regarding asset and source of income requirements.

HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO LOSSES.
The Company intends to enter into hedging transactions primarily to protect
itself from the effect of interest rate fluctuations on its floating rate
debt and also to protect its portfolio of mortgage assets from interest
rate and prepayment rate fluctuations. There can be no assurance that the
Company's hedging activities will have the desired beneficial impact on the
Company's results of operations or financial condition. Moreover, no
hedging activity can completely insulate the Company from the risks
associated with changes in interest rates and prepayment rates.

Hedging involves risk and typically involves costs, including
transaction costs. Such costs increase dramatically as the period covered
by the hedging increases and during periods of rising and volatile interest
rates. The Company may increase its hedging activity and, thus, increase
its hedging costs, during such periods when interest rates are volatile or
rising and hedging costs have increased. The incurrence of such costs will
limit the amount of cash available for distributions to stockholders. The
Company intends generally to hedge as much of the interest rate risk as the
Manager determines is in the best interests of the stockholders of the
Company given the cost of such hedging transactions and the need to
maintain the Company's status as a REIT.

The Company has not established specific policies as to the extent of
the hedging transactions in which it will engage; however, the Unaffiliated
Directors will be responsible for reviewing at their regular meetings the
extent and effect of hedging activities. The amount of income the Company
may earn from its hedging instruments is subject to certain limitations
under the REIT Provisions of the Code. See "Federal Income Tax
Consequences Requirements for Qualification Income Test." These
limitations may result in the Manager electing to have the Company bear a
level of interest rate risk that could otherwise be hedged when the Manager
believes, based on all relevant facts, that bearing such risk is advisable
to maintain the Company's status as a REIT.

Hedging instruments often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S.
or foreign governmental authorities. Consequently, there are no
requirements with respect to record keeping, financial responsibility or
segregation of customer funds and positions. The business failure of a
counterparty with which the Company has entered into a hedging transaction
will most likely result in a default. Default by a party with which the
Company has entered into a hedging transaction may result in the loss of
unrealized profits and force the Company to cover its resale commitments,
if any, at the then current market price. Although generally the Company
will seek to reserve for itself the right to terminate its hedging
positions, it may not always be possible to dispose of or close out a
hedging position without the consent of the counterparty, and the Company
may not be able to enter into an offsetting contract in order to cover its
risk. There can be no assurance that a liquid secondary market will exist
for hedging instruments purchased or sold, and the Company may be required
to maintain a position until exercise or expiration, which could result in
losses.

There can be no assurance that the Company will be able to obtain
financing at borrowing rates below the asset yields of its mortgage assets.
The Company will face competition for financing sources which may limit the
availability of, and adversely affect the cost of funds to, the Company.

TAX, LEGAL AND OTHER RISKS

Failure to Maintain REIT Status would have Adverse Tax Consequences.
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 of its assets, the amount of its
distributions to stockholders and the ownership of its stock. If the
Company fails to qualify as a REIT in any tax year, it would be taxed as a
regular domestic corporation. In that event, the Company would be subject
to federal income tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates, and distributions to the
Company's stockholders would not be deductible by the Company in computing
its taxable income. Any such corporate tax liability could be substantial
and would reduce the amount of cash available for distribution to the
Company's stockholders, which in turn could have an adverse effect on the
value of, and trading prices for, the Company's Common Stock. 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 the four
subsequent years.

The REIT provisions of the Code may limit the ability of the Company
to hedge its assets and the related Company borrowings. Under the REIT
provisions, the Company must limit its income in each year from "Qualified
Hedges" (together with any other income generated from other than
qualifying real estate assets) to less than 25% of the Company's gross
income. As a result, the Company may have to limit its use of certain
hedging techniques that might otherwise be 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 from Qualified Hedges in
excess of the 25% 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 tax purposes.

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 qualifying 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.

The Company must generally distribute at least 95% of its Taxable
Income each year. The Company's operations may from time to time generate
Taxable Income in excess of cash flows. For example, subordinated MBS
often are issued with OID, which generally is equal to the difference
between an obligation's issue price and its redemption price. Mezzanine
Loans also may be deemed to have OID for federal income tax purposes. OID
generally will be accrued using a constant yield methodology that does not
allow credit losses to be reflected until they are actually incurred. The
Company will be required to recognize as income each year the portion of
the OID that accrues during that year, which will increase the amount that
the Company must distribute for that year in order to avoid a corporate-
level income tax, notwithstanding the fact that there may be no
corresponding contemporaneous receipt of cash by the Company. In addition,
the Company may recognize taxable market discount income upon the receipt
of proceeds from the disposition of, or principal payments on, Mortgage
Loans and MBS that are "market discount bonds" (i.e., obligations with an
adjusted issue price that is greater than the Company's tax basis in such
obligations), although such proceeds often will be used to make non-
deductible principal payments on related borrowings. Finally, the Company
may recognize taxable income without receiving a corresponding cash
distribution if it forecloses on or makes a "significant modification" (as
specifically defined in the Treasury Regulations) to a Mortgage Loan, to
the extent that the fair market value of the underlying property or the
principal amount of the modified loan, as applicable, exceeds the Company's
basis in the original loan. Consequently, the Company's investments could
have the effect of requiring the Company to incur borrowings or to
liquidate a portion of its portfolio at rates or times that the Company
regards as unfavorable in order to distribute all of its taxable income and
thereby avoid corporate-level income tax and maintain its qualification as
a REIT.

Risk of Changes in the Tax Law Applicable to REITs. The rules dealing
with federal income taxation are constantly under review by the IRS, the
Treasury Department and Congress. New federal tax legislation or other
provisions may be enacted into law or new interpretations, rulings or
Treasury Regulations could be adopted, all of which could adversely affect
the taxation of the Company or its stockholders, possibly with retroactive
effect. No prediction can be made as to the likelihood of passage of any
new tax legislation or other provisions either directly or indirectly
affecting the Company or its stockholders.

Risk of Adverse Tax Treatment of Excess Inclusion Income. In general,
dividend income that a Tax-Exempt Entity receives from the Company should
not constitute unrelated business taxable 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 and, as to foreign stockholders, would be subject to
federal income tax withholding without reduction pursuant to any otherwise
applicable income tax treaty. Excess Inclusion income would be generated
if the Company were to acquire residual interests in one or more REMICs.
Although there is no Excess Inclusion Income currently generated by a non-
REMIC securitization, this result may change if Treasury Regulations are
issued regarding the application of the taxable mortgage pool rules of the
Code to REITs. The Company intends to arrange its securitizations in a
manner to avoid generating significant amounts of Excess Inclusion income.

Risk that Potential Future Offerings Could Dilute the Interest of
Holders of Common Stock. The Company expects in the future to 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, as well as all 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.

Future Revisions in Policies and Strategies Without Stockholder
Consent Create Uncertainty for Investors. The Company's Board of
Directors has established the investment policies, the operating policies,
and the strategies set forth in this Prospectus as the investment policies,
operating policies and strategies of the Company. However, these policies
and strategies may be modified or waived by the Board of Directors of the
Company without stockholder consent, subject, in certain cases, to approval
by a majority of the Unaffiliated Directors.

Significant Competition May Adversely Affect the Company's Ability to
Acquire Assets. The Company's net income depends, in large part, on the
Company's ability to acquire mortgage assets at favorable spreads over the
Company's borrowing costs. In acquiring mortgage assets, the Company
competes with other mortgage REITs, specialty finance companies, savings
and loan associations, banks, mortgage bankers, insurance companies, mutual
funds, institutional investors, investment banking firms, other lenders,
governmental bodies and other entities. In addition, there are numerous
mortgage REITs with asset acquisition objectives 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. Many of the
Company's anticipated competitors are significantly larger than the
Company, have access to greater capital and other resources and may have
other advantages over the Company. 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
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 markets or significant operating failures of
competitors may adversely affect the market price of the Common Stock.

Failure to Maintain Exclusion from the Investment Company Act Would
Restrict the Company's Operating Flexibility. 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 excludes from
regulation entities that are primarily engaged in the business of
purchasing or otherwise acquiring "mortgages and other liens on and
interests in real estate." Under the current interpretations of the staff
of the Commission, in order to qualify for this exception, 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 and an additional 25% of its assets in
real estate related assets. In addition, unless certain mortgage backed
securities represent all the certificates issued with respect to an
underlying pool of mortgage loans, such 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 many mortgage assets, therefore,
will be limited by the provisions of the Investment Company Act. If the
Company fails to qualify for exception 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.

Failure to Develop a Public Market May Result in a Decrease in Market
Price. 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 his
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." While there can be no assurance that a market for the
Common Stock will develop, the Company will apply to have the Common Stock
listed on the NYSE under the symbol (" .")

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
strongly influenced by any variation between the gross yield on the
Company's assets (net of credit losses) and prevailing market interest
rates, with any narrowing of the spread between yield and cost adversely
affecting the price of the Common Stock. In addition, since any positive
spread between the yield on its assets and the cost of its borrowings will
not necessarily be larger in high interest rate environments than in low
interest rate environments, the Net Income of the Company and, therefore,
the dividend yield on its Common Stock, may be less attractive compared
with alternative investments, which could negatively affect the price of
the Common Stock.

Temporary Investment in Short-term Investments Will Reduce the
Earnings of the Company. The Company's results of operations may be
adversely affected during the period in which the Company is initially
implementing its investment, leveraging and hedging strategies since during
this time the Company will be primarily invested in short-term investments.

Restrictions on Ownership of the Common Stock. In order for the
Company to meet the requirements for qualification as a REIT at all times,
the Articles of Incorporation prohibit any person from acquiring or
holding, directly or indirectly, shares of capital 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 any class of capital stock of the
Company ("Excess Shares"). The Articles of Incorporation further prohibit
(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 would 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 a violation of one or more ownership
limitations, then that number of shares of capital 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 of a Trust for the exclusive benefit
of one or more Charitable Beneficiaries, and the Intended Transferee may
not acquire any rights in such shares; provided, however, that if any
transfer occurs which, if effective, would result in shares of capital
stock being owned by fewer than 100 persons, then the transfer shall be
null and void and the Intended Transferee shall acquire no rights to the
stock. Subject to certain limitations, the Company's Board of Directors
may increase or decrease the ownership limitations or waive the limitations
for certain investors. See "Description of Capital Stock Repurchase of
Shares and Restrictions on Transfer."

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.

The provisions of the Company's Articles of Incorporation or relevant
Maryland law 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.

Material provisions of the Maryland General Corporation Law ("MGCL")
relating to "business combinations" and a "control share acquisition" and
of the Articles of Incorporation 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.

Possible Environmental Liabilities. The Company may become subject to
environmental risks when it acquires interests in properties with material
environmental problems. Such environmental risks include the risk that
operating costs and values of these assets may be adversely affected by the
obligation to pay for the cost of complying with existing environmental
laws, ordinances and regulations, as well as the cost of complying with
future legislation. Such laws often impose liability regardless of whether
the owner or operator knows of, or was responsible for, the presence of
such hazardous or toxic substances. The costs of investigation,
remediation or removal of hazardous substances could exceed the value of
the property. The Company's income and ability to make distributions to
its stockholders could be affected adversely by the existence of an
environmental liability with respect to its properties.

The Company may invest in real property with known material
environmental problems or Mortgage Loans secured by such real property. If
it does so, the Company may take certain steps to limit its liability for
such environmental problems, such as creating a special purpose entity to
own such Real Property. Despite these steps, there are risks associated
with such an investment. The Manager has only limited experience in
investing in Real Property with environmental problems.

Limitation on Liability of Manager. Pursuant to the Management
Agreement, the Manager will not assume any responsibility other than to
render the services called for thereunder and will not be responsible for
any action of the Board of Directors in following or declining to follow
its advice or recommendations. The Manager and its directors and officers
will not be liable to the Company, 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 Company has agreed to indemnify the
Manager and its directors and officers with respect to all expenses,
losses, damages, liabilities, demands, charges and claims arising from acts
of the Manager not constituting bad faith, willful misconduct, gross
negligence or reckless disregard of duties, performed in good faith in
accordance with and pursuant to the Management Agreement.

Investments May Be Illiquid and Their Value May Decrease. Many of the
Company's assets are and will be relatively illiquid. In addition, certain
of the MBS that the Company will acquire will include interests that have
not been registered under the relevant securities laws, resulting in a
prohibition against transfer, sale, pledge or other disposition of those
MBS except in a transaction that is exempt from the registration
requirements of, or is otherwise in accordance with, those laws. The
ability of the Company to vary its portfolio in response to changes in
economic and other conditions may be relatively limited. No assurances can
be given that the fair market value of any of the Company's assets will not
decrease in the future.

Plans Should Consider ERISA Risks of Investing in Common Stock.
Fiduciaries of employee benefit plans subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), should
consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in the Common Stock. In addition, fiduciaries of
employee benefit plans or other retirement arrangements (such as an
individual retirement account ("IRA") or certain H.R. 10 Plans or Keogh
plans) which are subject to Title I of ERISA, and/or Section 4975 of the
Code, as well as any entity, including an insurance company general
account, whose underlying assets include plan assets by reason of a plan or
account investing in such entity, should consult with their legal counsel
to determine whether an investment in the Common Stock will cause the
assets of the Company to be considered plan assets pursuant to the plan
asset regulations set forth at 29 C.F.R. Section 2510.3-101, thereby
subjecting the Plan to the prohibited transaction rules and the Company's
assets to the fiduciary investment standards of ERISA, or cause the excise
tax provisions of Section 4975 of the Code, to apply to the Company's
assets, unless some exception or exemption granted by the Department of
Labor applies to the acquisition, holding or transfer of the Common Stock.
See "ERISA Considerations."

Year 2000 Compliance. As the year 2000 approaches, an issue has
emerged regarding how existing application software programs and operating
systems can accommodate this date value. Failure to adequately address
this issue could have potentially serious repercussions. The Manager is
in the process of working with the Company's service providers to prepare
for the year 2000. Based on information currently available, the Company
does not expect that it will incur significant operating expenses or be
required to incur material costs to be year 2000 compliant.

USE OF PROCEEDS

The net proceeds from the Offering will be used by the Company to
purchase its initial portfolio of assets, only $ of which have been
identified. See "Initial Investments." The following table sets forth
information concerning the projected use of proceeds:

ESTIMATED APPLICATION OF PROCEEDS OF THIS OFFERING

Dollar
Amount
(in thousands) Percent

Gross Offering Proceeds1 $ 100%
Public Offering expenses:
Underwriting Commissions
Organizational and Offering Costs2
Registration Fees
======== ========
Net Proceeds Available for
Investments(3) $ %

___________________________

1 Assumes that all ____ shares offered to the public are sold and that
the Underwriter's overallotment option is exercised in full.

2 Includes legal, accounting, printing and other expenses of this
Offering.

3 Does not give effect to the fees payable to the Manager as such fees
fluctuate, based on Average Invested Assets and returns. See
"Management Compensation."

The Company intends temporarily to invest proceeds of the offering in
readily marketable interest bearing assets until appropriate real estate
assets are identified and acquired. The Company may require up to six
months to have the net proceeds of the Offering fully invested in long term
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 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 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. The Company's 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.

In order to avoid corporate income and excise tax and to maintain its
qualification 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 and not including 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 noncash 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.

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."

CAPITALIZATION

The capitalization of the Company, as of _________ __, 1997 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby
and to PNC at an assumed initial public offering price per share at the
mid-point of the offering range set forth on the cover page of this
Prospectus, is as follows:

As Adjusted(1)(2)
Actual (in thousands)

Preferred Stock, par value $.001
Authorized - 100,000,000 shares
None outstanding
Common Stock, par value $.001 $ $
Authorized - 400,000,000 shares
Outstanding - [ ] shares
(as adjusted _______ shares)
Additional Paid-in Capital $
__________ _______________
Total $ $
========== ===============

(1) Before deducting offering expenses estimated to be $_______, payable
by the Company, and assuming no exercise of the Underwriters'
overallotment option to purchase up to an additional _______ shares of
Common Stock. Includes shares of Common Stock to be purchased by PNC
Bank

(2) Does not include _______ shares of Common Stock reserved for issuance
upon exercise of options granted under the Company's 1998 Stock Option
Plan. See "Management of the Company Stock Options."

CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST

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 portfolio. However, the Board of Directors will evaluate the
performance of the Manager before entering into or renewing any management
arrangement and the Unaffiliated Directors will review in connection with
each renewal of the Management Agreement that the Manager's compensation is
reasonable in relation to the nature and quality of services performed.
Any material changes in the Company's investment and operating policies are
required to be approved by the Board of Directors. See "Risk
Factors - Conflicts of Interest"; and "- Future Revisions of Policies and
Strategies."

The Company, on the one hand, and the Manager and its Affiliates, on
the other, may in the future, enter into a number of relationships other
than those governed by the Management Agreement and other than the right of
first offer, 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 Affiliates of the
Manager 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; provided that the Board
intends to approve investment guidelines, including guidelines for
affiliate transactions, that would permit certain affiliate transactions to
be closed without prior Board approval. The Manager will be required to
provide a detailed report of such transactions, including evidence that the
term of such transactions are fair, to the Board on a quarterly basis.

The Manager has informed the Company that it expects to continue to
purchase and manage mortgage assets and other real estate related assets in
the future for third-party accounts. In addition, the Manager and its
Affiliates may from time to time purchase mortgage assets for their own
account. Except for the right of first offer on PNC loans, the Manager and
its Affiliates will have no obligation to make any particular investment
opportunities available to the Company. As a result, there may be a
conflict of interest between the operations of the Manager and its
Affiliates in the acquisition and disposition of mortgage assets. The
Company expects to acquire mortgage assets from the Manager's Affiliates.
In addition, the Company may, but has no current plans to, invest as a co-
participant with Affiliates of the Manager in loans originated or acquired
by such Affiliates. Although such investments will be subject to review by
a committee of Unaffiliated Directors, it is anticipated that they will
rely primarily on information provided by the Manager. Such conflicts may
result in decisions and/or allocations of mortgage assets by the Manager
that are not in the best interests of the Company although the Manager
seeks to allocate investment opportunities in a fair manner among accounts
for which particular opportunities are suitable and to achieve the most
favorable price in all transactions.

Pursuant to the terms of the Management Agreement, the Manager will
allocate investment and disposition opportunities in accordance with
policies and 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. In addition, in some cases, some forms of pro
rata allocations may be used and, in other cases, random allocation
processes may be used.

From time to time, mortgage lenders offer for sale large pools of
mortgage loans and REO properties pursuant to a competitive bidding
process. In such a case, the Manager may choose an unaffiliated entity
with which to submit a joint bid for the pool, as long as the Manager takes
title only to the mortgage loans and not the real estate.

Many investments appropriate for the Company also will be appropriate
for accounts of other clients the Manager advises. Situations may arise in
which the investment activities of the Manager or the other accounts may
disadvantage the Company, such as the inability of the market to fully
absorb orders for the purchase or sale of particular securities placed by
the Manager for the Company and its other accounts at prices and in
quantities which would be obtained if the orders were being placed only for
the Company. The Manager may aggregate orders of the Company with orders
for its other accounts. Such aggregation of orders may not always be to
the benefit of the Company with regard to the price or quantity executed.

THE COMPANY

GENERAL

The Company was recently organized to invest in a diversified
portfolio consisting of multifamily, commercial and residential Mortgage
Loans, mortgage backed securities and other real estate related assets.

The Company expects to use its equity and borrowed funds to seek to
generate net income for distribution to stockholders based primarily on the
spread between the yield on its assets (net of credit losses) and the cost
of its borrowings and hedging activities. The Company will endeavor to
qualify and will elect to be taxed as a REIT under the Code. If the
Company so qualifies the Company generally will not be subject to federal
income tax to the extent that it distributes its income to its
stockholders. See "Federal Income Tax Consequences." 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 PNC and the Manager.

INVESTMENT STRATEGY

The Company's investment strategy will be to maximize its net income
by investing in a diversified portfolio of Mortgage Loans, MBS and other
real estate related assets. In creating and managing its investment
portfolio, the Company will utilize the Manager's expertise and significant
business relationships of the Manager with its Affiliates, as well as
unrelated participants in the real estate industry. The Company intends to
trade its assets actively but does not intend to acquire, hold or sell
assets in such a manner that such assets would be characterized as dealer
property for federal income tax purposes.

The Company intends to acquire the following types of investments:
(i) Mortgage Loans; (ii) MBS, including CMBS and RMBS, fixed and adjustable
rate Privately-Issued Certificates and Agency Certificates, CMOs and REMIC
interests, and Mortgage Derivatives, including IOs; (iii) multifamily and
commercial real properties; (iv) Non-U.S. Mortgage Loans, Non-U.S. MBS and
real properties; and (v) other assets. Consistent with the Company's
policy of maintaining its status as a REIT for federal income tax purposes,
substantially all of the Company's assets will consist of Qualified REIT
Real Estate Assets under the REIT Provisions of the Code. See "Description
of Mortgage Assets" for a description of these instruments.

The Company will finance its assets with the net proceeds of the
Offering, future equity offerings and borrowings and expects that it will
maintain a debt-to-equity ratio of up to 6:1, although the actual ratio may
be higher or lower than this range from time to time. The Company will
leverage primarily with reverse repurchase agreements, dollar rolls,
securitizations of its Mortgage Loans, secured and unsecured borrowings,
commercial paper and issuance of Preferred Stock.

Although the Company intends to invest primarily in Mortgage Loans and
CMBS, the Company's business decisions will depend on changing market
factors. Thus the company cannot anticipate with any certainty the
percentage of its assets that will be invested in each category of real
estate related assets. The Company has a great deal of discretion as to
the manner in which it may invest, leverage and hedge its assets. The
Company may change any of its policies without stockholder approval, but
subject to approval by a majority of the Unaffiliated Directors of the
Company. There can be no assurance that the Company will be successful in
its investment strategy.

In order to maintain the Company's REIT status, the Company generally
intends to distribute to stockholders aggregate dividends equaling at least
95% of its Taxable Income each year. See "Federal Income Tax Consequences"

OPERATING POLICIES AND STRATEGIES

OPERATING POLICIES. The Board of Directors (including a majority of
the Unaffiliated Directors) must approve operating policies for the
Company. The Board of Directors may, in its discretion, revise such
Policies from time to time in response to changes in market conditions or
opportunities without stockholder approval.

The Company will also adopt compliance guidelines, including
restrictions on acquiring, holding and selling assets, to ensure that the
Company establishes and maintains its qualification as a REIT and is
excluded from regulation as an investment company. Before acquiring any
asset, the Manager will determine whether such asset would constitute a
Qualified REIT Real Estate Asset under the REIT Provisions of the Code.
Substantially all of the assets that the Company intends to acquire are
expected to be Qualified REIT Real Estate Assets. The Company will
regularly monitor purchases of mortgage assets and the income generated
from such assets, including income from its hedging activities, in an
effort to ensure that at all times the Company maintains its qualification
as a REIT and its exclusion under the Investment Company Act.

The Unaffiliated Directors will review all transactions of the Company
on a quarterly basis to ensure compliance with the operating policies and
to ratify all transactions with PNC and its Affiliates, except that the
purchase of securities from PNC and its Affiliates will require prior
approval. The Unaffiliated Directors are likely to rely substantially on
information and analysis provided by the Manager to evaluate the Company's
Operating Policies, Compliance therewith and other matters relating to the
Company's investments.

CAPITAL AND LEVERAGE POLICIES. The Company's operations are expected
to be highly leveraged. Initially, the Company intends to finance its
acquisition of mortgage assets through the proceeds of the Offering and,
thereafter, primarily by borrowing against or "leveraging" its existing
portfolio and using the proceeds to acquire additional mortgage assets.
See "Risk Factors Leverage Increases Risk of Loss." The Company expects to
incur debt such that, once fully invested, it will maintain a debt-to-
equity ratio of up to 6:1, although the actual ratio may be higher or
lower from time to time depending on market conditions and other factors
deemed relevant by the Manager. The actual debt-to-equity ratio will
depend on the Manager's assessment of acceptable risk consistent with the
nature of the assets then held by the Company. For example, immediately
following the Offering, a significant portion of the proceeds is expected
to be invested in short-term high quality assets and the Company's debt-to-
equity ratio is likely to be high. The Company's Articles of Incorporation
and Bylaws do not limit the amount of indebtedness the Company can incur,
and the Board of Directors has discretion to deviate from or change the
Company's indebtedness policy at any time. However, the Company intends to
maintain an adequate capital base to protect against various business
environments in which the Company's financing and hedging costs might
exceed interest income (net of credit losses) from its mortgage assets.
These conditions could occur, for example, due to credit losses or when,
due to interest rate fluctuations, interest income on the Company's
mortgage assets lags behind interest rate increases in the Company's
borrowings, which are expected to be predominantly variable rate. See
"Risk Factors Interest Rate Fluctuations May Adversely Affect Value of
Mortgage Assets, Net Income and Common Stock."

LIABILITIES. Mortgage assets, other than securitized Mortgage Loans,
will be financed primarily at short-term borrowing rates through reverse
repurchase agreements, dollar roll agreements, loan agreements, lines of
credit, commercial paper borrowings and other credit facilities with
institutional lenders. The Company may also borrow long term and issue
preferred Stock.

Reverse repurchase agreements are structured as sale and repurchase
obligations and have the economic effect of allowing a borrower to pledge
purchased mortgage assets as collateral securing short-term loans to
finance the purchase of such mortgage assets. Typically, the lender in a
reverse repurchase arrangement makes a loan in an amount equal to a
percentage of the market value of the pledged collateral. At maturity, the
borrower is required to repay the loan and the pledged collateral is
released. Pledged mortgage assets continue to pay principal and interest
to the borrower.

A dollar roll agreement provides for the sale and delayed delivery of
mortgage assets and a simultaneous forward repurchase commitment by the
borrower to repurchase the same or a substantially similar security on a
future date. During the roll period, the borrower forgoes principal and
interest payments on the mortgage assets, but is compensated by the
interest earned on the cash proceeds of the initial sale of the mortgage
assets and the spread on the forward repurchase price. Because the dollar
roll provides a borrower with funds for the roll period, its value may be
expressed as an "implied financing rate." Dollar rolls are a favorable
means of financing when the forward repurchase price is low compared to the
initial sale price, making the implied financing rate lower than
alternative short-term borrowing rates. The Company's ability to enter
into dollar roll agreements may be limited in order to maintain the
Company's status as a REIT or to avoid the imposition of tax on the
Company.

The Company expects that reverse repurchase agreements and, to the
extent consistent with the REIT Provisions of the Code, dollar roll
agreements will be, together with Mortgage Loan securitizations, the
principal means of leveraging its mortgage assets. However, the Company
may also utilize warehouse lines of credit or issue secured or unsecured
notes of any maturity if it appears advantageous to do so. The Company
expects to issue shares of preferred stock, including in connection with
the acquisition of assets. The Company intends to enter into reverse
repurchase agreements with financially sound institutions, including
broker/dealers, commercial banks and other lenders, which meet credit
standards approved by the Board of Directors. Upon repayment of a reverse
repurchase agreement, or a repurchase pursuant to a dollar roll agreement,
the Company intends to pledge the same collateral promptly to secure a new
reverse repurchase agreement or will sell similar collateral pursuant to a
new dollar roll agreement. Since the Company is newly-formed and has not
commenced operations, it has not yet established any lines of credit or
collateralized financing facilities. The Company has conducted preliminary
discussions with potential lenders and believes, on the basis of these
discussions, that it will be able to obtain financing in amounts and at
interest rates consistent with the Company's financing objectives.

The reverse repurchase and dollar roll agreements also would require
the Company to deposit additional collateral (a "margin call") or reduce
its borrowings thereunder, if the market value of the pledged collateral
declines. This may require the Company to sell mortgage assets to provide
such additional collateral or to reduce its borrowings. The Company
intends to maintain an equity cushion sufficient to provide liquidity in
the event of interest rate movements and other market conditions affecting
the market value of the pledged mortgage assets. However, there can be no
assurance that the Company will be able to safeguard against being required
to sell mortgage assets in the event of a change in market conditions.

RELATIONSHIP WITH PNC. PNC Bank will enter into an agreement granting
to the Company, for as long as the Management Agreement with the Manager
remains in effect, a right of first offer to purchase not less than $1
billion annually of multifamily and commercial Mortgage Loans typical of
those originated by PNC Bank and which PNC has determined to make available
for distribution. Such Mortgage Loans may be of the type suitable to be
sold to conduits ("Conduit Loans") or ineligible for sale to conduits
("Non-Conduit Loans"). In general, Non-Conduit Loans potentially have
greater yields than Conduit Loans, but they also carry greater risks.
Although not contractually committed to do so, the Company presently intends
to purchase the Mortgage Loans offered to it pursuant to the foregoing right
of first offer, subject to compliance with the Company's policy guidelines and
underwriting criteria as established and modified from time to time and the
parties anticipate that the Non-Conduit Loans will be funded by the Company
directly to the borrower at closing of the loan transaction and the Company
will pay PNC Bank an origination fee. The consideration for such
origination fees could, in some circumstances, consist of securities
of the Company. The Company also expects in certain circumstances to
commit to purchase certain Mortgage Loans from PNC Bank prior to funding,
enabling PNC Bank to make loans which do not meet its retention criteria,
while providing the Company with an additional source of assets for
acquisition. The descriptions below are of typical mortgage loans the
Company expects to purchase from PNC Bank; however, such loans are typical
only of certain classes of loans typically originated by PNC Bank which may
be purchased by the Company.

Multifamily and commercial Mortgage Loans originated for
securitization by PNC Bank typically are evidenced by a promissory note and
secured by a mortgage, deed of trust or other similar security instrument
that creates a security interest in real property. The Mortgage Loans
originated by PNC Bank include acquisition, renovation, construction and
term loans as well as secured and unsecured lines of credit. PNC has also
allocated $100 million to the mezzanine debt sector. PNC's Capital Markets
subsidiary is a leading provider of syndicated real estate bank debt and
affordable housing financing. The Mortgage Loans originated for
securitization to date have been secured by properties concentrated in the
Middle Atlantic States, increasing the risk of exposure to a downturn in
local economic conditions, but the acquisition of Midland is expected by
PNC Bank to lessen that geographic concentration in the future.

PNC Bank generally requires that mortgaged properties be subject to a
"Phase I" environmental assessment or an update of a previously conducted
assessment conducted in accordance with industry-wide standards. In
addition, PNC Bank examines whether the use and operation of the mortgaged
properties were in compliance in all material respects with all applicable
zoning, land-use, environmental, building, fire and health ordinances,
rules, regulations and orders applicable to such properties. In almost all
cases, the Mortgage Loans require that each mortgaged property be insured
by a hazard insurance policy in a specified amount.

The Company expects that the Mortgage Loans purchased from PNC Bank
generally will have (i) terms to stated maturity ranging from 12 to 120
months, (ii) amortization terms ranging from interest only to 360 months
and (iii) loan-to-value ratios at origination ranging from 35% to 85%, and
such loans may be whole loans or participations.

The Company expects to maintain a relationship with PNC Bank in which
the Company will be a ready, willing and able purchaser of not only
Mortgage Loans, but also other assets that may be offered from time to time
by PNC Bank (such home equity and single family mortgage financings).
Although no binding commitment will exist on the part of PNC Bank or the
Company regarding the sale and purchase of such other assets, the Company
expects to be able to purchase such other assets from PNC Bank on terms and
at prices that will be fair to both parties and that meet the Company's
investment policy for transactions with affiliates. If an asset that
otherwise meets all of the Company's criteria for asset acquisition is
being offered to the Company by PNC Bank or one of its Affiliates at a
price that is greater, or on terms that are less favorable, than would be
available from third parties for similar assets in bona fide arm's length
transactions, the Manager would be expected to recommend that the Company
decline to acquire that asset at the quoted price and terms,
notwithstanding the relationship among the Company, PNC Bank and its
Affiliates.

The Manager will determine fair transfer prices for the Company's
acquisitions of assets from PNC Bank and its Affiliates based on guidelines
approved by the Unaffiliated Directors. The Unaffiliated Directors will
review those transactions on a quarterly basis to insure compliance with
the guidelines, except that the purchase of securities from PNC Bank and
its affiliates must be approved in advance.

In deciding whether to approve an acquisition of any assets, including
acquisitions of Mortgage Loans, MBS and other assets from PNC Bank or its
Affiliates, including Midland, the Manager may consider such information as
it deems appropriate to determine whether the acquisition is consistent
with the guidelines, such as whether the price is fair and the investment
otherwise is suitable and in the best interests of the Company. In
addition, the Manager may consider, among other factors, whether the
acquisition of that asset will enhance the Company's ability to achieve or
exceed the Company's risk adjusted target rate of return, if any, whether
the asset otherwise is well-suited for the Company and whether the Company
financially is able to take advantage of the investment opportunity
presented thereby. There is no geographic limitation or requirement of
geographic diversification (either as to size, jurisdictional boundary, zip
code or other geographic measure) as to the properties that secure
repayment of the Mortgage Loans or underlying the MBS contemplated to be
acquired or created by the Company; the only limitations as to the type of
assets that the Company may acquire and the characteristics thereof being
limitations either (i) imposed by law, (ii) set forth in the Guidelines or
(iii) with which the Company must comply as a condition of maintaining both
its status as a REIT and its exemption from regulation under the Investment
Company Act.

When possible, the price that the Company will pay for Mortgage Loans,
MBS and other assets acquired from PNC Bank or its Affiliates will be
determined by reference to the prices most recently paid to PNC Bank or its
Affiliates for similar assets, adjusted for differences in the terms of
such transactions and for changes in market conditions between the dates of
the relevant transactions. If no previous sales of similar assets have
occurred, the Company will attempt to determine a market price for the
asset by an alternative method, such as obtaining a broker's price opinion
or an appraisal, if it can do so at a reasonable cost. Investors should
understand, however, that such determinations are estimates and are not
bona fide third-party offers to buy or sell.

Although no formal agreement exists, it is anticipated if the
acquisition by PNC occurs, that Midland will serve as a source of assets to
be acquired and will act as servicer for those mortgage loans for which the
Company acquires servicing rights. Midland would receive compensation at
market rates.

It is the intention of the Company that the agreements and
transactions, including the sale of pools of Mortgage Loans, MBS and real
property, between the Company on the one hand and PNC Bank and its
Affiliates on the other hand are fair to both parties. However, there can
be no assurance that each of such agreements and transactions will be on
terms at least as favorable to the Company as it could have obtained from
unaffiliated third parties.

SECURITIZATION. The Company intends to acquire and accumulate
Mortgage Loans for securitization and may use ASC for such purposes.
Securitization is the process of pooling Mortgage Loans and other fixed
income assets in a trust or other special purpose vehicle and issuing
securities, such as MBS or other debt securities, from the special purpose
vehicle. The Company intends to securitize Mortgage Loans primarily by
issuing structured debt in non-REMIC transactions. Under this approach,
for accounting purposes, the securitized Mortgage Loans will remain on the
Company's balance sheet as assets and the debt obligations (such as the
CMOs) will appear as liabilities. The proceeds of securitizations by the
Company will be used to reduce preexisting borrowings relating to such
assets and to purchase additional assets. Issuing structured debt in this
manner locks in potentially less expensive, long-term, non-recourse
financing that better matches the terms of the Mortgage Loans and fixed
income instruments serving as collateral for such debt.

The Company also may employ, from time to time to the extent
consistent with the REIT Provisions of the Code, other forms of
securitization under which a "sale" of an interest in the Mortgage Loans
occurs, and a resulting gain or loss is recorded on the Company's balance
sheet for accounting purposes at the time of sale. In a "sale"
securitization, only the net retained interest in the securitized Mortgage
loans will remain on the Company's balance sheet. The Company may elect to
conduct certain of its securitization activities, including such sales,
through one or more taxable subsidiaries or through "Qualified REIT
Subsidiaries", as defined under the REIT Provisions of the Code, formed for
such purpose. To the extent consistent with the REIT Provisions of the
Code, such entity would elect to be taxed as a Real Estate Mortgage
Investment Conduit ("REMIC") or a Financial Asset Securitization Investment
Trust ("FASIT").

The Company expects that it will retain interests in the underlying
Mortgage Loans which will be subordinated with respect to payments of
principal and interest on the underlying Mortgage Loans to the classes of
securities issued to investors in such securitizations. Accordingly, any
losses incurred on the underlying Mortgage Loans will be applied first to
reduce the remaining amount of the Company's retained interest, until
reduced to zero. Thereafter, the Company would have no further exposure to
losses.

Typically, in connection with the creation of a new Mortgage Loan
securitization, the issuer generally will be required to enter into a
master servicing agreement with respect to such series of mortgage
securities with an entity acceptable to the Rating Agencies, that regularly
engages in the business of servicing Mortgage Loans (the "Master
Servicer"). In order to assist the Company in maintaining its exclusion
from investment company regulation, the Company expects that it will
acquire or retain the right to initiate, direct or forbear foreclosure
proceedings in connection with defaults on any of the underlying Mortgage
Loans and may retain special servicers, including Midland, to maintain
borrower performance and to exercise available remedies, including
foreclosure, at the direction of the Company. Exercise of such rights may
require the Company to be responsible for advancing payments to investors
in such securitizations as if such default has not occurred.

The Company intends to structure its securitizations so as to avoid
the attribution of any Excess Inclusion Income to the Company's
stockholders. See "Federal Income Tax Consequences - Taxation of
Stockholders."

CREDIT RISK MANAGEMENT. With respect to its assets, the Company will
be exposed to various levels of credit and special hazard risk, depending
on the nature of the underlying assets and the nature and level of credit
enhancements supporting such assets. The Company will originate or
purchase mortgage loans which meet minimum debt service coverage standards
established by the Company. The Manager will review and monitor credit
risk and other risks of loss associated with each investment. In addition,
the Manager will seek to diversify the Company's portfolio of assets to
avoid undue geographic, issuer, industry and certain other types of
concentrations. The Company's Board of Directors will monitor the overall
portfolio risk and review levels of provision for loss.

ASSET/LIABILITY MANAGEMENT. 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 both through hedging activities and by attempting to
structure the key terms of its borrowings to generally correspond (in the
aggregate for the entire portfolio, and not on an asset-by-asset basis) to
the interest rate and maturity parameters of its assets.

HEDGING ACTIVITIES. The Company intends to enter into hedging
transactions to protect its investment portfolio from interest rate
fluctuations and other changes in market conditions. These transactions
may include interest rate swaps, the purchase or sale of interest rate
collars, caps or floors, options, Mortgage Derivatives and other hedging
instruments. These instruments may be used to hedge as much of the
interest rate risk as the Manager determines is in the best interest of the
Company's stockholders, given the cost of such hedges and the need to
maintain the Company's status as a REIT. The Manager may elect to have the
Company bear a level of interest rate risk that could otherwise be hedged
when the Manager believes, based on all relevant facts, that bearing such
risk is advisable. The Manager has extensive experience in hedging real
estate assets with these types of instruments.

Hedging instruments often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S.
or foreign governmental authorities. Consequently, there may be no
requirements with respect to record keeping, financial responsibility or
segregation of customer funds and positions. The Company will enter into
these transactions only with counterparties with long term debt rated 'A'
or better by at least one of the Rating Agencies. The business failure of
a counterparty with which the Company has entered into a hedging
transaction will most likely result in a default, which may result in the
loss of unrealized profits and force the company to cover its resale
commitments, if any, at the then current market price. Although generally
the Company will seek to reserve for itself the right to terminate its
hedging positions, it may not always be possible to dispose of or close out
a hedging position without the consent of the counterparty, and the Company
may not be able to enter into an offsetting contract in order to cover its
risk. There can be no assurance that a liquid secondary market will exist
for hedging instruments purchased or sold, and the Company may be required
to maintain a position until exercise or expiration, which could result in
losses.

The Company intends to protect its investment portfolio against the
effects of significant interest rate fluctuations and to preserve the net
income flows and capital value of the Company. Specifically, the Company's
asset acquisition and borrowing strategies are intended to offset the
potential adverse effects resulting from the differences between fixed
rates or other limitations on coupon rate adjustment, such as interest rate
caps, associated with its mortgage assets and the shorter term
predominantly variable nature of the Company's related borrowings.

The Company's hedging activities are intended to address both income
and capital preservation. Income preservation refers to maintaining a
stable spread between yields from mortgage assets and the Company's
borrowing costs across a reasonable range of adverse interest rate
environments. Capital preservation refers to maintaining a relatively
steady level in the market value of the Company's capital across a
reasonable range of adverse interest rate scenarios. To monitor and manage
capital preservation risk, the Company will model and measure the
sensitivity of the market value of its capital (i.e., the combination of
its assets, liabilities and hedging positions) to various changes in
interest rates in various economic scenarios. The Company will not enter
into these types of transactions for speculative purposes.

The Company will focus its hedging activities on providing a level of
income and capital protection against reasonable interest rate risks.
However, no strategy can insulate the Company completely from changes in
interest rates.

OTHER POLICIES. The Company intends to invest and operate in a manner
consistent with the requirements of the Code to establish and maintain its
qualification as a REIT for federal income tax purposes (see "Federal
Income Tax Consequences Taxation of the Company"), unless, due to
changes in the tax laws, changes in economic conditions or other
fundamental changes in the Company's business environment, the Board of
Directors, with the consent of the holders of a majority of the shares of
Common Stock outstanding and entitled to vote on the question, determines
that it is no longer in the best interest of the Company to qualify as a
REIT.

The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act.

The Company has the authority to offer shares of its capital stock and
to repurchase or otherwise reacquire such shares or any other of its
securities. Under certain circumstances the Company may purchase shares of
its Common Stock in the open market or otherwise. The Board of Directors
has no present intention to cause the Company to repurchase any of its
shares and any such action would be taken only in conformity with
applicable federal and state laws and the requirements for qualification as
a REIT for federal income tax purposes.

Except in connection with its formation, the Company has not, to date,
issued shares of Common Stock or other securities. The Company has not
made loans to officers and directors and does not intend to do so. The
Company does not intend to engage in trading, underwriting or agency
distribution or sale of securities of other issuers.

The Company has no present intention to invest in the securities of
other issuers for the purpose of exercising control. The decision to do so
is vested solely in the Board of Directors and may be changed without a
vote of the shareholders.

FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Company's Board of
Directors (including the Unaffiliated Directors) will approve 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 determines that such modification or
waiver is in the best interest of the Company or its 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.

DESCRIPTION OF REAL ESTATE RELATED ASSETS

The Company intends to invest principally in the following types of
mortgage assets subject to the operating restrictions described in
"Operating Policies and Strategies" above and the additional policies
described below.

MORTGAGE LOANS. The Company intends to acquire and accumulate fixed
and adjustable-rate Mortgage Loans senior or subordinate liens on
multifamily residential, commercial, single-family (one-to-four unit)
residential or other real property as a significant part of its investment
strategy.

The Mortgage Loans may be originated by or purchased from various
suppliers of mortgage assets throughout the United States and abroad, 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 Company may also originate its own
Mortgage Loans, particularly bridge financing of Mortgage Loan and real
property portfolios. 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.

In considering whether to acquire a pool of Mortgage Loans, the
Company's policy is to request that the Manager perform certain due
diligence tasks on behalf of the Company that reasonably may be expected to
provide relevant and material information as to the value of the Mortgage
Loans within that pool and whether the Company should acquire that pool.

The Company's policy is to acquire Mortgage Loans only at prices that
are fair to the Company and that meet the Company's investment criteria.
In determining the price of a Mortgage Loan, the Company may request that
the Manager review and analyze a number of factors. These factors include
market conditions (market interest rates, the availability of mortgage
credit and economic, demographic, geographic, tax, legal and other
factors). They also include a yield to maturity of the Mortgage Loan, the
liquidity of the Mortgage Loan, the limitations on the obligations of the
seller with respect to the Mortgage Loan, the rate and timing of payments
to be made with respect to the Mortgage Loan, the mortgaged property
underlying the Mortgage Loan, the risk of adverse fluctuations in the
market values of that mortgaged property as a result of economic events or
governmental regulations, the historical performance and other attributes
of the property manager responsible for managing the mortgaged property,
relevant laws limiting actions that may be taken with respect to loans
secured by real property and limitations on recourse against the obligors
following realization on the collateral through various means, risks of
timing with respect to Mortgage Loan prepayments, risks associated with
geographic concentration of underlying assets constituting the mortgaged
property for the relevant Mortgage Loan, environmental risks, pending and
threatened litigation, junior liens and other issues relating to title, a
prior history of defaults by affiliated parties on similar and dissimilar
obligations, and other factors.

DISTRESSED MORTGAGE LOANS. The Company may acquire Nonperforming or
Subperforming Mortgage Loans secured by multifamily and commercial
properties. In general, the Company expects to foreclose on such Mortgage
Loans in an attempt to acquire title to the underlying Distressed Real
Properties. If the Company acquires pools of Distressed Mortgage Loans (or
pools of Mortgage Loans that are primarily Distressed Mortgage Loans), the
Company's policy is that the due diligence to be performed before acquiring
such Distressed Mortgage Loans or pools is to be substantially similar to
the due diligence process described above in connection with the
acquisition of performing Term Loans and the due diligence process
described below to be performed in connection with the acquisition of
Distressed Real Properties.

CONSTRUCTION FINANCING, BRIDGE FINANCING AND LOANS SUBJECT TO PRIOR
LIENS. The Company may invest in or provide Construction Loans. The
Company will be permitted to make a Construction Loan of up to 90% of total
project costs if the Construction Loan is secured by a first lien mortgage,
deed of trust or deed to secure debt, as collateral security for the
borrower's obligations with respect to the Construction Loan. In addition,
the Company may invest in or provide Mezzanine Loans to owners of real
properties that are encumbered by first lien mortgages, deeds of trust or
deeds to secure debt, but only if the Company's Mezzanine Loans are to be
secured by junior liens on the subject properties. The policy of the
Company is that, at the time of origination of a Mezzanine Loan, the value
of the subject property should exceed the sum of the outstanding balances
of the debt secured by the first lien and the maximum amount contemplated
to be advanced by the Company under the Mezzanine Loan. With respect to
both Construction Loans and Mezzanine Loans, the Company may receive not
only a stated fixed or variable interest rate on the loan, but also a
percentage of gross revenues or a percentage of the increase in the fair
market value of the property securing repayment of that Construction Loan
or Mezzanine Loan, payable upon maturity or refinancing of the applicable
Construction Loan or Mezzanine Loan or upon the sale of the property. The
Company may also provide bridge financing, generally in the form of secured
loans, for the acquisition of Mortgage Loan portfolios, real properties or
other real estate related assets.

COMMITMENTS TO MORTGAGE LOAN SELLERS. The Company may issue
commitments ("Commitments") to originators and other sellers of Mortgage
Loans and MBS, including PNC Bank, who follow policies and procedures that
comply with all applicable federal and state laws and regulations and
satisfy the Company's underwriting criteria. 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 loans are required
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.

Mortgage Loans acquired by the Company will generally be 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, floods or windstorms) 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.

The Company may obtain commitments for mortgage pool insurance on the
Mortgage Loans it acquires 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
overcollateralization. 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 loan prior to its securitization.

In addition to credit enhancement, the Company may also obtain a
commitment for special hazard insurance on the Mortgage Loans, if available
at reasonable cost, to mitigate casualty losses that are not usually
covered by standard hazard insurance, such as vandalism, war, earthquake,
floods and windstorm. This special hazard insurance is generally 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.
Accordingly, the risks associated with such special hazard losses exist
only between the times the Company purchases a Mortgage Loan and the
inclusion of such Mortgage Loan within a newly created issue of mortgage
securities.

It is expected that when the Company acquires Mortgage Loans, the
seller will represent and warrant to the Company that there has been no
fraud or misrepresentation during the origination of the Mortgage Loans.
It will agree to repurchase any 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
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.

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.

The Company intends to retain a subordinate interest in the pools of
Mortgage Loans it securitizes and to acquire subordinate interests in pools
of Mortgage Loans securitized by others. The credit quality of Mortgage
Loans and the mortgage securities utilizing Mortgage Loans as the
underlying collateral, depends on a number of factors, including their
loan-to-value ratio, their terms and the geographic diversification of the
location of the properties securing the Mortgage Loans and, in the case of
multi-family and commercial properties, the creditworthiness of tenants and
debt service coverage ratios.

BRIDGE LOANS. Bridge loans are short-term loans (generally 2-4 years)
secured by liens on real property or by a pledge of partnership interests
in a portfolio of properties. Bridge loans are not intended to be
permanent debt capital but rather, interim financing prior to the sale of
the property or its refinancing with bank debt or mortgage loans. The
loans generally pay a floating rate of interest based on LIBOR or a similar
floating rate index.

Bridge loans carry a high sensitivity to default or extension of
principal repayment terms due to the need for refinancing and minimal
principal amortization. As they are associated with transfers of equity
ownership, property repositioning and tenant lease-up, bridge loans bear
the risk that operating strategies may not be successful, economic
conditions may deteriorate and competitors may undertake competing
strategies.

MORTGAGE-BACKED SECURITIES. The Company intends to acquire MBS,
primarily non-investment grade classes, from various sources. MBS
typically are divided into two or more interests, sometimes called
"tranches" or "classes." The Senior classes are often securities which, if
rated, would have ratings ranging from low investment grade "BBB" to higher
investment grades "A," "AA" or "AAA." The junior, subordinated classes
typically would include one or more non-investment grade classes which, if
rated, would have ratings below investment grade "BBB." Such subordinated
classes also typically include an unrated higher-yielding, credit support
class (which generally is required to absorb the first losses on the
underlying Mortgage Loans).

MBS generally are issued either as CMOs or Pass-Through Certificates.
"CMOs" are debt obligations of special purpose corporations, owner trusts
or other special purpose entities secured by commercial Mortgage Loans or
MBS. Pass-Through Certificates evidence interests in trusts, the primary
assets of which are Mortgage Loans. CMO Bonds and Pass-Through
Certificates may be issued or sponsored by agencies or instrumentalities of
the United States Government or private originators of, or investors in,
Mortgage Loans, including savings and loan associations, mortgage bankers,
commercial banks, investment banks and other entities. MBS may not be
guaranteed by an entity having the credit status of a governmental agency
or instrumentality and in this instance are generally structured with one
or more of the types of credit enhancement described below. In addition,
MBS may be illiquid.

In most non-government mortgage loan securitizations, MBS are issued
in multiple classes in order to obtain investment-grade credit ratings for
the senior classes and thus increase their marketability. Each class of
MBS may be issued with a specific fixed or variable coupon rate and has a
stated maturity or final scheduled distribution date. Principal
prepayments on the Mortgage Loans comprising the mortgage collateral may
cause the MBS to be retired substantially earlier than their stated
maturities or final scheduled distribution dates, although, with respect to
commercial Mortgage Loans, there generally are penalties for or limitation
on the ability of the borrower to prepay the loan. Interest is paid or
accrued on MBS on a periodic basis, typically monthly.

The credit quality of MBS depends on the credit quality of the
underlying mortgage collateral. Among the factors determining the credit
quality of the mortgage collateral will be a government or agency guarantee
ratio of the Mortgage Loan balances to the value of the properties securing
the Mortgage Loans, the purpose of the Mortgage Loans (e.g., refinancing or
new purchase), the amount of the Mortgage Loans, their terms, the
geographic diversification of the location of the properties securing the
Mortgage Loans, and, in the case of commercial Mortgage Loans, the credit-
worthiness of tenants.

The principal of and interest on the underlying Mortgage Loans may be
allocated among the several classes of a MBS in many ways, and the credit
quality of a particular class results primarily from the order and timing
of the receipt of cash flow generated from the underlying Mortgage Loans.
Subordinated interests in MBS carry significant credit risks. Typically,
in a "senior-subordinated" structure, the subordinated interest provide
credit protection to the senior classes by absorbing losses form loan
defaults or foreclosures before such losses are allocated to senior
classes. As long as the more senior classes of securities are outstanding,
all prepayments on the Mortgage Loans generally are paid to those senior
classes, at least until the end of a lock-out period, which typically is
five years or more. In some instances, particularly with respect to
subordinated interests in commercial mortgage securitizations, the holders
of subordinated interests are not entitled to receive scheduled payments of
principal until the more senior classes are paid in full or until the end
of a lock-out period. Because of this structuring of the cash flows from
the underlying Mortgage Loans, subordinated interests in a typical
securitization are subject to a substantially greater risk of non-payment
than are the more senior classes. Accordingly, the subordinated interests
are assigned lower credit ratings, or no ratings at all.

As a result of the typical "senior-subordinated" structure, the
subordinated classes of MBS will be extremely sensitive to losses on the
underlying Mortgage Loans. For example, if the Company owns a $20 million
first loss subordinated class of MBS consisting of $100 million of
underlying Mortgage Loans, a 7% loss on the underlying Mortgage Loans
generally will result in a 70% loss of the stated principal amount of the
subordinated interest. Accordingly, the holder of the subordinated
interest is particularly interested in minimizing the loss frequency (the
percentage of the loan balances that default over the life of the mortgage
collateral) and the loss severity (the amount of loss on defaulted Mortgage
Loans, i.e., the principal amount of the Mortgage Loan unrecovered after
applying any recovery to the expenses of foreclosure and accrued interest)
on the underlying Mortgage Loans.

Losses on the mortgage collateral underlying the Company's MBS will
depend upon a number of factors, many of which will be beyond the control
of the Company or the applicable servicer. Among other things, the default
frequency on the mortgage collateral will reflect broad conditions in the
economy generally and real property particularly, economic conditions in
the economy generally and real property particularly, economic conditions
in the local area in which the underlying mortgaged property is located,
the loan-to-value ratio of the Mortgage Loan, the purpose of the loan, and
the debt service coverage ratio (with respect to commercial and multifamily
Mortgage Loans). The loss severity on the mortgage collateral will depend
upon many of the same factors described above, and will also be influenced
by certain legal aspects of Mortgage Loans that underlie the MBS acquired
by the Company, including the servicer's ability to foreclose on the
defaulted Mortgage Loan and sell the underlying mortgaged property.
Various legal issues affect the ability to foreclose on a Mortgage Loan or
sell the mortgaged property. These legal issues may extend the time of
foreclosure proceedings or may require the expenditure of additional sums
to sell the underlying Mortgaged Property, in either case increasing the
amount of loss with respect to the Mortgage Loans.

In considering whether to acquire an MBS, the Company's policy is to
determine, in consultation with the Manager, the scope of review to be
performed before the Company acquires that MBS, which will be designed to
provide to the Company such information regarding that MBS as the Company
and Manager determine to be relevant and material to the Company's decision
regarding the acquisition of that MBS. The Company's policy generally is
to request that the Manager perform due diligence substantially similar to
that described above in connection with the acquisition of performing
Mortgage Loans. The due diligence may include an analysis of (i) the
underlying collateral pool, (ii) the prepayment and default history of the
originator's prior loans, (iii) cash flow analyses under various prepayment
and interest rate scenarios (including sensitivity analyses) and (iv) an
analysis of various default scenarios. The Company also may request that
the Manager determine and advise the Company as to the price at which the
Manager would recommend acquisition of the MBS by the Company, and the
Manager's reasons for such advice. However, which of these characteristics
(if any) are important and how important each characteristic may be to the
evaluation of a particular MBS depends on the individual circumstances.
Because there are so many characteristics to consider, each MBS must be
analyzed individually, taking into consideration both objective data as
well as subjective analysis.

Many of the MBS to be acquired by the Company will not have been
registered under the Securities Act, but instead initially will have been
sold in private placements. These MBS will be subject to restrictions on
resale and, accordingly, will have substantially more limited marketability
and liquidity.

CMO Residuals are derivative mortgage securities issued by agencies of
the U.S. Government or by private originators of, or investors in, Mortgage
Loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Many special purpose trusts or corporations that issue multi-class MBS
elect to be treated, for federal income tax purposes, as REMICs. The
Company may acquire not only MBS that are treated as regular interests in
REMICs, but also those that are designated as REMIC Residual Interests or
as Non-REMIC Residual Interests. The cash flow generated by the Mortgage
Loans underlying a series of CMOs is first applied to the required payments
of principal and interest on the CMOs and second to pay the related
administrative expenses of the issuer. The Residual Interest generally
receives excess cash flows, if any, after making the foregoing payments.
The amount of Residual Interest cash flow will depend on, among other
things, the characteristics of the Mortgage Loans, the coupon rate of the
CMOs, prevailing interest rates, and particularly the prepayment experience
of the Mortgage Loans. Regular Interests in a REMIC are treated as debt
for tax purposes. Unlike regular interests, REMIC Residual Interests
typically generate Excess Inclusion or other forms of taxable income
(including the accretion of market discount) that bear no relationship to
the actual economic income that is generated by a REMIC. REMIC Residual
Interests that are required to report taxable income or loss but receive no
cash flow from the Mortgage Loans are called "Non-Economic Residuals."

Any purchases and sales of REMIC Residual Interests will be conducted
in a fully taxable corporate subsidiary to prevent the liability for Excess
Inclusion Income from being passed to the Company's Shareholders. See
"Federal Income Tax Consequences - Taxation of Taxable U.S. Stockholders."

Any REMIC securitizations carried out by the Company will generally
create a REMIC Residual Interest. If the residual is a Non-Economic
Residual, the Company may incur a negative purchase price to dispose of it,
or the Company may retain it in a fully taxable corporate subsidiary. See
"Operating Policies and Strategies-Securitizations."

Subordinated MBS generally are issued at a significant discount to
their outstanding principal balance, which gives rise to OID for federal
income tax purposes. The Company will be required to accrue the OID as
taxable income over the life of the related subordinated MBS on a level-
yield method whether or not the Company receives the related cash flow.
The OID income attributable to a subordinated MBS generally will increase
the amount the Company must distribute to its stockholders in order to
avoid corporate income tax on its retained income in the early years of the
Company's ownership of the MBS even though the Company may not receive the
related cash flow from the MBS until a later taxable year. As a result,
the Company could be required to borrow funds, to issue capital stock or to
liquidate assets in order to distribute all of its taxable income and
thereby avoid corporate income tax in any taxable year.

COMMERCIAL MORTGAGE-BACKED SECURITIES. It is expected that many of
the MBS acquired by the Company will be interests in CMBS. The mortgage
collateral supporting CMBS may be pools of whole loans or other MBS, or
both. Of the interests in CMBS that the Company acquires, most will be
subordinated or IO classes of MBS Interests, but the Company also may
acquire more senior classes or combined classes of first-loss and more
senior CMBS.

Unlike RMBS, which typically are collateralized by thousands of single
family Mortgage Loans, CMBS are collateralized generally by a more limited
number of commercial or multifamily Mortgage Loans with larger principal
balances than those of single family Mortgage Loans. As a result, a loss
on a single Mortgage Loan underlying a CMBS will have a greater negative
effect on the yield of such CMBS, especially the subordinated MBS in such
CMBS.

With respect to CMBS, the Company will use sampling and other
appropriate analytical techniques to determine on a loan-by-loan basis
which loans will undergo a full-scope review and which loans will undergo a
more streamlined review process. Although the choice is a subjective one,
considerations that influence the choice for scope of review often include
loan size, debt service coverage ratio, loan to value ratio, loan maturity,
lease rollover, property type and geographic location. A full-scope review
may include, among other factors, a property site inspection, tenant-by-
tenant rent roll analysis, review of historical income and expenses for
each property securing the loan, a review of major leases for each property
(if available); recent appraisals (if available), engineering and
environmental reports (if available), and the price paid for similar CMBS
by unrelated third parties in arm's length purchases and sales (if
available) or a review of broker price opinions (if the price paid by a
bona fide third party for similar CMBS is not available and such price
opinions are available). For those loans that are selected for the more
streamlined review process, the Manager's evaluation may include a review
of the property operating statements, summary loan level data, third party
reports, and a review of prices paid for similar CMBS by bona fide third
parties or broker price opinions, each as available. If the Manager's
review of such information does not reveal any unusual or unexpected
characteristics or factors, no further due diligence is performed.

FHA AND GNMA PROJECT LOANS. The Company intends to invest in loan
participations and pools of loans insured under a variety of programs
administered by the Department of Housing and Urban Development ("HUD").
These loans will be insured under the National Housing Act and will provide
financing for the purchase, construction or substantial rehabilitation of
multifamily housing, nursing homes and intermediate care facilities,
elderly and handicapped housing, and hospitals.

Similar to CMBS, investments in FHA and GNMA Project Loans will be
collateralized by a more limited number of loans, with larger average
principal balances, than RMBS, and will therefore be subject to greater
performance variability. Loan participations are most often backed by a
single FHA-insured loan. Pools of insured loans, while more diverse, still
provide much less diversification than pools of single family loans.

FHA insured loans will be reviewed on a case by case basis to identify
and analyze risk factors which may materially impact investment
performance. Property specific data such as debt service coverage ratio,
loan to value ratio, HUD inspection reports, HUD financial statements and
rental subsidies will be analyzed in determining the appropriateness of a
loan for investment purposes. The Manager will also rely on the FHA
insurance contracts and their anticipated impact on investment performance
in evaluating and managing the investment risks. FHA insurance covers 99%
of the principal balance of the underlying project loans. Additional GNMA
credit enhancement may cover 100% of the principal balance.

PASS-THROUGH CERTIFICATES. 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 FNMA, FHLMC and GNMA, as
well as privately issued adjustable-rate and fixed-rate mortgage pass-
through certificates. The Pass-Through Certificates to be acquired by the
Company will represent interests in mortgages that will be secured by liens
on single-family (one-to-four units) residential properties, multifamily
residential properties and commercial properties.

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 adjustment features of the Mortgage Assets owned
by the Company, the maturity schedules of the Company's borrowings and
related hedging.

PRIVATELY ISSUED PASS-THROUGH CERTIFICATES. Privately issued Pass-
Through Certificates are structured similarly to the FNMA, 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, investment banks and
special purpose subsidiaries of such institutions. Privately issued Pass-
Through Certificates are usually backed by a pool of conventional Mortgage
Loans and are generally structured with credit enhancement such as pool
insurance or subordination. However, privately issued Pass-Through
Certificates are typically not guaranteed by an entity having the credit
status of FNMA, FHLMC or GNMA guaranteed obligations.

FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation. FNMA provides funds to the mortgage market primarily by
purchasing Mortgage Loans on homes from local lenders, thereby replenishing
their funds for additional lending.

FNMA Certificates may be backed by pools of Mortgage Loans secured by
single-family or multi-family residential properties. The original terms
to maturities of the Mortgage Loans generally do not exceed 40 years. FNMA
Certificates may pay interest at a fixed rate or adjustable rate. Each
series of FNMA ARM certificates bears an initial interest rate and margin
tied to an index based on all loans in the related pool, less a fixed
percentage representing servicing compensation and FNMA's guarantee fee.
The specified index used in each such series has included the Treasury
Index, the 11(th) District Index, LIBOR and other indices. Interest rates
paid on fully-indexed FNMA ARM 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 FNMA ARM certificates
issued to date have evidenced pools of Mortgage Loans with monthly, semi-
annual or annual interest rate adjustments. Adjustments in the interest
rates paid are generally limited to an annual increase or decrease of
either 100 or 200 basis points and to a lifetime cap of 500 or 600 basis
points over the initial interest rate. Certain FNMA programs include
Mortgage Loans which allow the borrower to convert the adjustable mortgage
interest rate of its ARM to a fixed rate. ARMs which are converted into
fixed rate Mortgage Loans are repurchased by FNMA, or by the seller of such
loans to FNMA, at the unpaid Principal balance thereof plus accrued
interest to the due date of the last adjustable rate interest payment.

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

FHLMC CERTIFICATES. FHLMC is a privately owned corporate
instrumentality of the United States created pursuant to an Act of
Congress. 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 MBS.

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
Mortgage Loans purchased by FHLMC. The Mortgage Loans 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.

FHLMC guarantees to each holder of its 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 Mortgage Loans, 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.

GNMA CERTIFICATES. GNMA is a wholly owned corporate instrumentality
of the United States within HUD. GNMA guarantees 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 and other loans eligible for
inclusion in mortgage pools underlying GNMA Certificates. GNMA
Certificates constitute general obligations of the United States backed by
its full faith and credit.

CMOs. The Company may invest, from time to time, in adjustable rate
and fixed rate CMOs issued by private issuers or FHLMC, FNMA or GNMA. CMOs
are a series of bonds or certificates ordinarily issued in multiple
classes, each of which consists of several classes with different
maturities and often complex priorities of payment, secured by a single
pool of Mortgage Loans, Pass-Through Certificates, other CMOs or other
mortgage assets. Principal prepayments on collateral underlying a CMO may
cause it to be retired substantially earlier than the stated maturities or
final distribution dates. Interest is paid or accrues on all interest
bearing classes of a CMO on a monthly, quarterly or semi-annual basis. The
principal and interest on underlying Mortgages Loans may be allocated among
the several classes of a series of a CMO in many ways, including pursuant
to complex internally leveraged formulas that may make the CMO class
especially sensitive to interest rate or prepayment risk.

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.
Privately-issued single-family, multi-family and commercial CMOs are
supported by private credit enhancements similar to those used for
Privately-Issued Certificates and are often issued as senior-subordinated
mortgage securities. In general, the Company intends to only acquire CMOs
or multi-class Pass-Through certificates that represent beneficial
ownership in grantor trusts holding Mortgage Loans, or regular interests
and residual interests in REMICs, or that otherwise constitute Qualified
REIT Real Estate Assets.

MORTGAGE DERIVATIVES. The Company may acquire Mortgage Derivatives,
including IOs, Inverse IOs, Sub IOs and floating rate derivatives, as
market conditions warrant. Mortgage Derivatives 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 Derivatives 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 Mortgage Derivatives representing the right to receive interest
only or a disproportionately large amount of interest, i.e., IOs, would be
likely to decline. Conversely, the rates of return on Mortgage Derivatives
representing the right to receive principal only or a disproportional
amount of principal, i.e., POs, would be likely to increase in the event of
rapid prepayments.

Some IOs in which the Company may invest, such as Inverse IOs, bear
interest at a floating rate that varies inversely with (and often at a
multiple of) changes in a specific index. The yield to maturity of an
Inverse IO is extremely sensitive to changes in the related index. The
Company also may invest in inverse floating rate Mortgage Derivatives which
are similar in structure and risk to Inverse IOs, except they generally are
issued with a greater stated principal amount than Inverse IOs.

Other IOs in which the Company may invest, such as Sub IOs, have the
characteristics of a Subordinated Interest. A Sub IO is entitled to no
payments of principal; moreover, interest on a Sub IO often is withheld in
a reserve fund or spread account to fund required payments of principal and
interest on more senior trenches of mortgage securities. Once the balance
in the spread account reaches a certain level, excess funds are paid to the
holders of the Sub IO. These Sub IOs provide credit support to the senior
classes and thus bear substantial credit risks. In addition, because a Sub
IO receives only interest payments, its yield is extremely sensitive to the
rate of prepayments (including prepayments as a result of defaults) on the
underlying Mortgage Loans.

IOs can be effective hedging devices because they generally increase
in value as fixed rate mortgage securities decrease in value. The Company
also may invest in other types of derivatives currently available in the
market and other Mortgage Derivatives that may be developed in the future
if the Manager determines that such investments would be advantageous to
the Company.

MULTIFAMILY AND COMMERCIAL REAL PROPERTIES. The Company believes that
under appropriate circumstances the acquisition of multifamily and
commercial real properties, including REO Properties and other Distressed
Real Properties, may offer significant opportunities to the Company. The
Company's policy will be to conduct an investigation and evaluation of the
real properties in a portfolio of real properties before purchasing such a
portfolio. Prior to purchasing real estate related assets, the Manager
generally will identify and contact real estate brokers and/or appraisers
in the relevant market areas to obtain rent and sale comparables for the
assets in a portfolio contemplated to be acquired. This information will
be used to supplement due diligence that will be performed by the Manager's
employees.

The Company's policy is to conduct an investigation and evaluation of
the properties in a portfolio of real properties before acquiring such a
portfolio. Prior to acquiring such a portfolio, the Company's policy
generally is to request that the Manager identify and contact real estate
brokers and appraisers in the market area of the real properties within the
portfolio to obtain information regarding rental rates and sales prices of
comparable real property. The Company's policy is to determine, in
consultation with the Manager, whether to obtain a Phase I environmental
assessment (or, if available to the Company or the Manager, to request that
the Manager review a previously obtained Phase I environmental assessment)
for each real property, certain real properties, or none of the real
properties within the portfolio prior to its acquisition by the Company.
The policy of the Company is to use the information contained in such
comparables and environmental assessments to supplement the due diligence
that is to be performed by the Manager with respect to that portfolio.

The Company's policy generally is to request that the Manager include
within its due diligence review and analysis of those real properties
contemplated to be acquired by the Company a review of market studies for
each geographic market designated by the Company in which the real
properties within a portfolio are concentrated. The Company may request
that such studies include area economic data, employment trends, absorption
rates and market rental rates. The Company's policy is that such due
diligence analyses generally also include (i) site inspections of the most
significant properties in a portfolio of real properties (and, if the
Company determines that such a review will be cost-effective, a random
sampling of the less significant properties), and (ii) a review of all
property files and documentation that are made available to the Company or
the Manager. The Company generally will require that such reviews include,
to the extent possible, examinations of available legal documents,
litigation files, correspondence, title reports, operating statements,
appraisals and engineering and environmental reports.

The Company's policy is that the process of determining the fair
market value of a real property is to utilize those procedures that the
Company and the Manager deem relevant for the specific real property being
evaluated, which procedures need not be the same for each real property
being evaluated. Sources of information that may be examined in
determining the fair market value of a real property may include one or
more of the following: (a) current and historical operating statements;
(b) existing or new appraisals; (c) sales comparables; (d) industry
statistics and reports regarding operating expenses, such as those compiled
by the Institute of Real Estate Management and the Building Owners and
Managers Association; (e) existing leases and market rates for comparable
leases; (f) deferred maintenance observed during site inspections or
described in structural and engineering reports; and (g) correspondence and
other documents and memoranda found in the files of the seller of that Real
Property or other relevant parties.

The Manager is expected to develop projections of net operating income
and cash flows taking into account lease rollovers, tenant improvement
costs and leasing commissions. The Manager will compare its estimates of
revenue and expenses to historical operating statements and estimates
provided in appraisals and general industry and regional statistics.
Market capitalization rates and discount rates are then applied to the cash
flow projections to estimate values. These values are then compared to
available appraisals and market sale comparables to determine recommended
bid prices for each asset. The amount offered by the Company generally
will take into account projected holding periods, capital costs and
projected profit expectations, and will be the price that the Manager
estimates is sufficient to generate an acceptable risk-adjusted return on
the Company's investment.

After the Company acquires Distressed Real Property, the Company's
goal will be to improve management of that real property so as to increase
its cash flow. If cash flows can be increased and the net operating income
stabilized, the Company may seek an opportunity to sell the real property.
The length of time the Company will hold Distressed Real Properties may
vary considerably from asset to asset, and will be based on the Manager's
analysis and conclusions as to the best time to sell some or all of them.

If the Company is offered the opportunity to acquire real property
that is likely to be held for fewer than four years, the Company intends to
establish a taxable corporation in which the Company will hold a 95% non-
voting ownership interest to make the acquisition. Such a corporation will
not be eligible for taxation as a Qualified REIT Subsidiary, and any
profits that it earns on its activities will be subject to federal
corporate income tax before they are distributable to the Company. If the
Company acquires real property with the intent to hold it for more than
four years, but an opportunity arises to sell the property sooner, the
Company will consider certain strategies, such as a like-kind exchange, to
reduce any negative tax consequences relating to the sale.

FOREIGN REAL PROPERTIES. In addition to acquiring Distressed Real
Properties, the Company may acquire or originate Mortgage Loans secured by
real property located outside the United States or acquire such real
property, but the Company does not intend to invest more than 20% of its
portfolio in foreign real property and Mortgage Loans secured by foreign
real property. The Company has no limitations on the geographic scope of
its investments in foreign real properties and such investments may be made
in a single foreign country or among several foreign countries as the Board
of Directors may deem appropriate. Investing in real estate related assets
located in foreign countries creates risks associated with the uncertainty
of foreign laws and markets and risks related to currency conversion. The
Company may be subject to foreign income tax with respect to its
investments in foreign real estate related assets. However, any foreign
tax credit that otherwise would be available to the Company for U.S.
federal income tax purposes will not flow through to the Company's
stockholders.

When acquiring real properties located outside the United States or
Mortgage Loans secured by foreign real properties, the Company will
perform, or request that the Manager perform, a due diligence review and
analysis of such foreign Mortgage Loans or real properties substantially
similar to that described above in connection with the acquisition of
performing Mortgage Loans and real properties. In addition, the Company
will hire, or request that the Manager hire, a local law firm to advise the
Company concerning the applicable laws, including real property laws, of
the local jurisdiction and to provide a legal opinion about the Company's
rights with respect to the Mortgage Loans or real properties. If the
country in which the relevant real property is located is subject to
political instability, the Company may request that the Manager investigate
the availability of, cost of, and benefits that reasonably can be expected
to be provided to the Company by, obtaining insurance against such
political risks. The Company's policy is to purchase such insurance only
if the Manager advises the Company that based on the Manager's analysis of
the relevant factors, the Manager has determined that the Company should
purchase such insurance. The Company may request that the Manager consider
ways to minimize currency conversion risks that may be associated with the
investment in foreign Mortgage Loans or foreign real properties, such as
the purchase of currency swaps, and make a recommendation to the Company
with respect thereto.

REAL PROPERTIES WITH KNOWN ENVIRONMENTAL PROBLEMS. The Company may
acquire real properties with known material environmental problems and
Mortgage Loans secured by such real properties subsequent to an
environmental assessment that would reasonably indicate that the present
value of the cost of clean-up or remediation would not exceed the
realizable value from the disposition of the mortgage property. In
considering whether to acquire real properties with known material
environmental problems and Mortgage loans secured by such real properties,
the Company will perform, or request that the Manager perform, a due
diligence review and analysis substantially similar to that described above
in connection with the acquisition of Distressed Mortgage Loans and real
property. In addition, the Company will hire, or request that the Manager
hire, an environmental engineering consultant to estimate the extent and
cost of possible environmental remediation or monitoring if title was
acquired to a property with a material environmental problem and the time
required to effect such remediation or complete such monitoring. The
Manager has no experience in investing in Mortgage Loans secured by
environmental distressed real property, or in such environmentally
distressed real property.

The Company's policy is generally to avoid acquiring in its own name
real property with known material environmental problems (other than such
real property acquired by the Company through foreclosure, or deed-in-lieu
of foreclosure, when an "innocent lender" defense appears to be available
to the Company). The Company's policy instead is to establish a special
purpose entity to hold such real property. If the Company determines that
to do so would be appropriate, such special purpose entity could hold other
real properties with known material environmental problems that the Company
thereafter may wish to acquire. There can be no assurance that acquiring
or holding properties in the name of a special purpose entity would
insulate the Company from any environmental liabilities associated with
such properties. The Company may acquire environmental risk hazard
insurance from time to time when commercially available.

NET LEASED REAL ESTATE. The Company intends to invest in net leased
real estate on a leveraged basis. Net leased real estate is generally
defined as real estate that is net leased on a long-term basis (ten years
or more) to tenants who are customarily responsible for paying all costs of
owning, operating, and maintaining the leased property during the term of
the lease, in addition to the payment of a monthly net rent to the landlord
for the use and occupancy of the premises ("Net Leased Real Estate"). The
Company expects to acquire Net Leased Real Estate on a leveraged basis with
triple-net rents that will provide sufficient cash flow to provide an
attractive cash return on its investment therein after debt service.
Although the time during which the Company will hold Net Leased Real Estate
will vary, the Company anticipates holding most Net Leased Real Estate for
more than ten years. The Company will focus on Net Leased Real Estate that
is either leased to creditworthy tenants or is real estate that can be
leased to other tenants in the event of a default of the initial tenant.

The Company expects to have the tax depreciation associated with such
investments to offset the non-cash accrual of interest on certain MBS
Interests and Mortgage Loans, including the original issue discount ("OID")
generally associated with either MBS Interests that are issued at a
discount from par or participating Mortgage Loans and the "phantom" taxable
income associated with other MBS derivatives.

SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND INVESTMENTS IN OTHER SECURITIES

The Company may invest in fixed-income securities that are not
mortgage assets, including securities issued by corporations or issued or
guaranteed by U.S. or sovereign foreign entities, loan participations,
emerging market debt, high yield debt and collateralized bond obligations,
denominated in U.S. dollars.

The Company may also purchase the stock of other mortgage REITS or
similar companies when Management believes that such purchase will yield
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 may also
invest in securities issued by investment companies or other investment
funds.

EMPLOYEES

The Company initially expects not to have any employees other than
officers, each of whom will be full-time employees of the Manager, whose
duties will include performing administrative activities for the Company.

FACILITIES

The Company's executive offices are located at 345 Park Avenue, New
York, New York 10154.

LEGAL PROCEEDINGS

There are no pending legal proceedings to which the Company is a party
or to which any property of the Company is subject.

MANAGEMENT OF THE COMPANY

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following tables set forth certain information about the directors
and executive officers of the Company.

Name Age Position

INSIDE DIRECTORS

Laurence D. Fink 45 Chairman of the Board of Directors

Hugh R. Frater 42 President and Chief Executive Officer
and Director

UNAFFILIATED DIRECTORS

Donald G. Drapkin 50 Director

Jeffrey C. Keil 54 Director

Kendrick R. Wilson, III 51 Director

[ ] [ ] [ ]

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

Richard M. Shea 38 Chief Operating Officer

Edwin O. Bergman 32 Vice President

Chris A. Milner 31 Vice President

Andrew Siwulec 49 Vice President

Mark Warner 36 Vice President

Susan Wagner 36 Secretary

Because the Manager will assume principal responsibility for managing
the affairs of the company, the Company does not expect to employ full-time
personnel. Notwithstanding the foregoing, the officers listed above, who
are also officers of the Manager and will be compensated by the Manager,
are expected to devote a substantial amount of their time to the affairs of
the Company. Such persons will not have fiduciary obligations to the
Company and its Stockholders.

Directors and Executive Officers

LAURENCE D. FINK, Chairman, is also Chairman and Chief Executive
Officer of the Manager, Chairman of the Manager's Management Committee and
Co-Chair of the Manager's Investment Strategy Group. Mr. Fink serves on
the Asset Liability Committee of PNC Bank. He is also Chairman of the
Board and a Director of BlackRock's family of closed-end mutual funds, and
a Director of BlackRock's offshore funds.

Prior to founding BlackRock in 1988, Mr. Fink was a member of the
Management Committee and a Managing Director of The First Boston
Corporation. Mr. Fink joined First Boston in 1976. During his tenure at
The First Boston Corporation, Mr. Fink was co-head of the Taxable Fixed
Income Division, which was responsible for trading and distribution of all
government, mortgage and corporate securities. In 1989, Mr. Fink was
featured in The Wall Street Journal Centennial Edition as one of 28
"business leaders of tomorrow," and in 1987, Mr. Fink was featured in
Investment Dealers' Digest as head of the mortgage-related securities group
of "The Ultimate Brokerage Firm." Mr. Fink also started the Financial
Futures and Options Department and headed the Mortgage and Real Estate
Products Group.

Currently, Mr. Fink is a member of the Boards of Trustees of New York
University Medical Center, Dwight-Englewood School in Englewood, New
Jersey, the National Outdoor Leadership School (NOLS) and Phoenix House,
and a member of the Boards of Directors of VIMRx Pharmaceuticals Inc. and
Innovir Laboratories, Inc. [Previously, Mr. Fink was a member of Fannie
Mae's Advisory Council.] Mr. Fink earned a B.A. degree in political
science from the University of California at Los Angeles in 1974 and an
M.B.A. degree with a concentration in real estate from U.C.L.A. in 1976.

HUGH R. FRATER, President and Chief Executive Officer, is a Managing
Director of the Manager, where he is co-head of the BlackRock Account
Management Group and a member of the firm's Management Committee. Mr.
Frater's primary responsibilities include providing strategic and risk
management advice to BlackRock's financial services clients and developing
and marketing portfolio management services for tax-exempt and taxable
clients. His areas of expertise include general corporate finance and bank
and insurance company regulatory, accounting and investment issues.

Prior to joining BlackRock in 1988, Mr. Frater was a Vice President in
Investment Banking at Lehman Brothers in the financial institutions
department. Mr. Frater joined Lehman Brothers in 1985 as a generalist in
the Mortgage and Savings Institutions Group. From 1980 to 1983, Mr. Frater
was Director of Programming for The Learning Channel, an educational cable
television network.

Mr. Frater earned a B.A. degree in English from Dartmouth College in
1978 and an M.B.A. degree in finance from Columbia University in 1985.

DONALD G. DRAPKIN, Director, has been Vice Chairman and Director of
McAndrews & Forbes Holdings Inc. and various of its affiliates since March
1987. Prior to joining MacAndrews and Forbes, Mr. Drapkin was a partner in
the law firm of Skadden, Arps, Slate, Meagher & Flom for more than five
years. Mr. Drapkin also is a Director of the following corporations which
file reports pursuant to the Exchange Act: Algos Pharmaceutical
Corporation, The Cosmetic Center, Inc., The Coleman Company, Inc., Coleman
Holdings Inc., Coleman Worldwide Inc., Playboy Enterprises, Inc., Cardio
Technologies, Inc., Genta, Inc., Welder Nutrition International Inc., and
VIMRx Pharmaceuticals Inc. (On December 27, 1996, Marvel Holdings, Marvel
Parent, Marvel Entertainment Group, Inc., of which Mr. Drapkin is a
Director, and several of their respective subsidiaries, and Marvel III
Holdings Inc., of which Mr. Drapkin is a Director, filed voluntary
petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.).

KENDRICK R. WILSON, III, Director, has been Vice Chairman of Lazard
Freres & Co. LLC, a member of the firm's Management Committee and head of
the firm's merger and acquisition activities within the banking and
financial services industries since 1989. Prior to joining Lazard in 1989,
Mr. Wilson was President and Chief Operating Officer of Ranieri Wilson &
Co. Prior to joining Ranieri Wilson & Co., Mr. Wilson was a Senior
Executive Vice President and member of the Board of Directors of E.F.
Hutton & Co. and prior thereto he was a Managing Director in the financial
institutions group of Salomon Brothers Inc. Mr. Wilson is a director of
ITT Corporation, Bank United, American Buildings Company, Inc., Meigher
Communications, Inc., BlackRock Asset Investors and American Marine
Holdings, Inc.

Mr. Wilson received a B.A. from Dartmouth College and an M.B.A. From
Harvard Business School. He served as an officer in the U.S. Army Special
Forces in Vietnam.

JEFFREY C. KEIL, Director, has been Chairman of the Executive
Committee of International Real Returns, LLC, investment advisor to an
investment company organized by Lazard Freres & Co., since January 1998.
From 1996 to January 1998, Mr. Keil was a General Partner of Keil
Investment Partners, a private fund which invested in the financial sector
in Israel. From 1983 to 1996, Mr. Keil was President, Director and
Chairman of the Finance Committee of Republic New York Corporation and Vice
Chairman and a Member of the Executive Committee of Republic National Bank
of New York. Mr. Keil earned a B.S. degree in economics from the
University of Pennsylvania in 1965, pursued graduate studies in
mathematical statistics, operations research and international economics
from the London School of Economics, and earned an M.B.A. degree with a
concentration in Finance from Harvard Graduate School of Business
Administration in 1968.

RICHARD SHEA, ESQ., Chief Operating Officer, is a Director of the
Manager and a member of the Risk Management and Analytics Group. Mr. Shea
is responsible for the overall management of BlackRock's eight taxable term
trusts with total assets of approximately $5.3 billion as of December 31,
1997. The term trusts are fixed income closed-end mutual funds that
terminate on a specific date with a specific targeted net asset value at
termination. Mr. Shea is also responsible for tax and regulatory issues
for all of BlackRock's funds and partnerships. Mr. Shea has established
tax analytics, including a proactive CMO tax model, and procedures to
optimize fund performance within the framework of relevant tax laws. He
currently uses these systems to trade REMIC residuals and to support
trading of other MBS derivatives. He also works with clients that have
special tax situations and assists in designing investment strategies that
take these special needs into account.

Prior to joining BlackRock in 1993, Mr. Shea was an Associate Vice
President and tax counsel at Prudential Securities, Inc. Mr Shea joined
Prudential in 1988 and was responsible for corporate tax planning, tax-
oriented investment strategies and tax issues of CMOs and original issue
discount obligations. Mr. Shea previously worked as a Senior Tax
Specialist at Laventhol and Horwath for over four years where he structured
real estate limited partnership investments for the private placement
market.

Mr. Shea earned a B.S. degree, in accounting from the State University
of New York at Plattsburgh in 1981 and a J.D. degree from New York Law
School in 1984.

EDWIN O. BERGMAN, Vice President -- Risk Management, is also a Vice
President in BlackRock's Risk Management and Analytics group. Since
joining BlackRock in October 1996 Mr. Bergman has performed a variety of
functions throughout the Risk Management area. Mr. Bergman serves as a
team leader within the firm's Risk Management advisory practice. Mr.
Bergman has also developed capabilities which allow enhanced prepayment and
loss analysis of commercial mortgage backed securities, provide analysis
and pricing of money market securities and enhance the stratification and
pricing of the firm's mortgage holdings.

Prior to working at BlackRock, Mr. Bergman worked as an associate in
Booz, Allen & Hamilton's Financial Services and Technology Practice where
he developed credit pricing, pipeline hedging and information management
strategies for several large mortgage finance institutions in the United
States and Australia. Prior to working at Booz, Allen & Hamilton, Mr.
Bergman was a Vice President in Goldman, Sachs & Co.'s Mortgage Research
area from December 1992 to February 1995 where he developed models
supporting the structuring and analysis of commercial and residential
mortgage-backed securities and a variety of other asset-backed securities.
Prior to working at Goldman Sachs & Co., Mr. Bergman was a Senior Associate
at Morgan Stanley from July 1987 to December 1992 where he led teams
exploring applications of emerging technology and developing applications
supporting Fixed Income Compliance, Commodities Trading and Brokerage
Accounting.

Mr. Bergman received a B.A. in Economics and the Natural Sciences for
the Johns Hopkins University in May of 1987 with departmental honors in
Economics.

CHRIS A. MILNER, Vice President - Acquisitions, is also a Vice
President and Manager of PNC Real Estate Capital Markets, where he is
responsible for managing PNC's Commercial Mortgage-Backed Securities
Program and is a member of the Real Estate Banking Executive Committee.
Areas under Mr. Milner's direction include CMBS loan origination,
underwriting and closing as well as securitization.

Prior to co-founding PNC's CMBS Program in 1995, Mr. Milner was a Vice
President in PNC's real estate asset management subsidiary. In this
capacity, Mr. Milner was responsible for the restructure or sale of
distressed commercial real estate loans and the coordination of PNC's
special servicer ratings and sub-performing/non-performing loan sales.

Mr. Milner joined PNC in 1990 upon completion of his graduate work
(M.B.A.-Finance), magna cum laude with a concentration in Real Estate
Finance from Indiana University. While attending graduate school, Mr.
Milner worked at Melvin Simon & Associates - the predecessor to the
Simon/DeBartolo REIT - performing cashflow/refinance analyses on regional
mall properties. Mr. Milner earned a liberal arts B.A. degree from DePauw
University in 1988.

ANDREW SIWULEC, Vice President -- Loan Underwriting, is Senior Vice
President and Co-Manager of Institutional Real Estate for PNC Bank,
Institutional Real Estate encompasses public real estate companies, real
estate investment funds, and large private owners/developers throughout the
U.S. His responsibilities include business strategy and the management of
PNC's New York, New Jersey, Philadelphia, and Washington, D.C. offices. He
is a member of the Real Estate Executive Committee which serves as the
management committee for all commercial real estate activities at PNC.

Prior to joining PNC in 1996, Mr. Siwulec served as Senior Vice
President for commercial real estate workouts at Midlantic Bank where he
started in November 1991. During that period, he managed six teams of
professionals that worked out problem credits and sold performing and non-
performing real estate assets through eight portfolio sales. Mr. Siwulec
previously worked for a Washington, D.C. commercial mortgage banking firm
where he worked on developing a conduit for commercial mortgages and
managed non-performing assets for the firm and under contract with GNMA.
Mr. Siwulec began his real estate finance career at Continental Illinois
National Bank where he most recently managed commercial construction
lending nationwide.

Mr. Siwulec earned his A.B. in 1970 from The Johns Hopkins University
in Liberal Arts and his M.B.A. from The University of Pennsylvania, Wharton
School of Business in 1976 in finance.

MARK S. WARNER, CFA, Vice President, is a Director and portfolio
manager of the Manager, where his primary responsibility is managing client
portfolios, specializing in the commercial mortgage (CMBS) and non-agency
residential mortgage sectors.

Prior to joining BlackRock in 1993, Mr. Warner was a Director in the
Capital Markets Unit of the Prudential Mortgage Capital Company. Mr.
Warner joined Prudential in 1987, and was initially responsible for
asset/liability strategies for the participating annuity segment. Mr.
Warner joined Prudential's Commercial Real Estate Division in 1989, where
he was responsible for the sale of commercial whole loans, purchases of
private placement mortgage-backed securities and securitization
opportunities within Prudential's non-residential portfolio. Mr. Warner
previously worked in the fixed income department at PaineWebber.

Mr. Warner authored the chapter entitled "Commercial Mortgage-Backed
Securities Portfolio Management" in Whole-Loan CMOs, published by Frank J.
Fabozzi Associates in 1995 and, most recently, co-authored with Wesley
Edens, a Managing Director of BlackRock, the article entitled "The ABC's of
CMBS" for the Pension Real Estate Association's Fourth Quarter 1996
magazine. Mr. Warner earned a B.A. degree in political science from
Columbia University in 1983 and an M.B.A. degree in finance and marketing
from Columbia Business School in 1987. Mr. Warner received his Chartered
Financial Analyst (CFA) designation in 1993.

SUSAN L. WAGNER, Secretary, is a Managing Director of the Manager,
where she heads the International Business and Strategic Product
Development Departments and is a member of the Management Committee. Ms.
Wagner is primarily responsible for creating asset management products for
international investors and developing and maintaining relationships with
international clients. Ms. Wagner has also been responsible for several
special advisory assignments. Ms. Wagner serves as a Director of
BlackRock's offshore funds.

Prior to founding BlackRock in 1988, Ms. Wagner was a vice president
in the Mortgage and Savings Institutions Group at Lehman Brothers. Ms.
Wagner joined Lehman in 1984 in the Capital Markets Division and in 1986
was given responsibility for overseeing all subsidiaries through which
Lehman issued structured mortgage securities. During her tenure at Lehman,
Ms. Wagner worked on a wide variety of projects including structured
financings, portfolio restructuring, conventional debt and equity
offerings, and merger and acquisition transactions.

Ms. Wagner earned a B.A. degree, magna cum laude, in economics and
English from Wellesley College in 1982 and an M.B.A. degree in finance from
the University of Chicago in 1984.

Directors will be elected for a term of three years, and hold office
until their successors are elected and qualified. 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
$20,000, a fee of $1,000 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 other than
through the Company's Stock Option Plan.

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 six members consisting of two directors affiliated with the
Manager and four Unaffiliated Directors. The Unaffiliated Directors of the
Company will be named prior to the commencement of the Offering. 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 must 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 the Unaffiliated
Directors. The term "Unaffiliated Directors" refers to those directors
that are not affiliated, directly, or indirectly, with the Manager or PNC,
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 PNC or an Affiliated business entity of the
Manager or PNC.

The Articles of Incorporation of the Company also provides for three
classes of directors with staggered terms to provide for the election of
one class each year. Two of the classes of directors will contain one
affiliated director and one Unaffiliated Director and one class will
contain two Unaffiliated Directors. After the initial staggering period
(the first three years), all directors will serve for a term of three
years.

The Articles of Incorporation of the Company provides for the
indemnification of the directors and officers of the Company and the
Manager and its employees, officers, directors and controlling persons 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 Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act and is
therefore unenforceable.

The Articles of Incorporation of the Company provide 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 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. Maryland
law does not affect the potential liability of directors and officers to
third parties, such as creditors of the Company.

EXECUTIVE COMPENSATION

The Company has not paid, but may in the future pay, annual
compensation to the Company's executive officers for their services as
executive officers. 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
pursuant to the Company's 1998 Stock Option Plan. See "-- Stock Options"
below.

STOCK OPTIONS

The Company has adopted a Stock option plan (the "1998 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. Nonqualified Stock options may be granted to the
Manager, directors, officers, any key employees of the Company and to the
directors, officers and key employees of the Manager. The exercise price
for any qualified option granted under the 1998 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 1998 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 1998 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 1998 Stock Option Plan authorizes the grant of
options to purchase an aggregate of up to 9.8% of the outstanding shares of
the Company's Common Stock, but not more than__________ shares of Common
Stock. If an option granted under the 1998 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
1998 Stock Option Plan. Excluding the initial Stock option grants
discussed in the succeeding Section, option grants shall be limited
annually to the purchase of the lesser of __% of the outstanding shares of
Common Stock or ________ shares. Unless previously terminated by the Board
of Directors, the 1998 Stock Option Plan will terminate ten years from its
effective date, and no options may be granted under the 1998 Stock Option
Plan thereafter.

The 1998 Stock Option Plan will be administered by a committee of the
Board of Directors comprised entirely of Unaffiliated Directors (the
"Compensation Committee") options granted under the 1998 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 1998 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 1998 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
exercise price of all shares to be purchased, (iii) by cancellation of
indebtedness owed by the Company to the optionholder, (iv) by any
combination of the foregoing, or (v) 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 1998 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 1998 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 1998 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 to be granted under
the 1998 Stock Option Plan effective on the closing of the Offering.

STOCK OPTION GRANTS

POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
_________________ _____________________

OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE(2) EXPIRATION
NAME GRANTED(1) EMPLOYEES ($/SHARE) DATE 5%($) 10%(S)
_______ _________ __________ __________ ___________ _____ ______

(1) The options granted are exercisable starting one year 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.

THE MANAGER

The Manager is a subsidiary of PNC Bank, National Association ("PNC
Bank"), which is itself a wholly owned subsidiary of PNC Bank Corp. PNC
Bank is the 13th largest bank in the U.S. Established in 1988, the Manager
is a registered investment adviser under the Investment Advisers Act of
1940 and is one of the largest fixed income investment management firms in
the United States. The Manager engages in investment and risk management
as its sole businesses and specializes in the management of domestic and
offshore fixed income assets for pension and profit sharing plans,
financial institutions such as banking and insurance companies and mutual
funds for retail and institutional investors.

The Manager has more than $100 billion in assets under management for
several mutual funds and institutional investors, including over $15
billion in commercial, multifamily and residential mortgage-backed
securities and provides non discretionary risk management advisory
services for mortgage assets for over $500 billion in mortgage assets and
servicing rights on mortgage assets.

The address of the Manager is 345 Park Avenue, New York, New York
10154.

THE MANAGEMENT AGREEMENT

The Company will enter into the Management Agreement with the Manager
for an initial term expiring on the second anniversary of the closing of
the Offering. Thereafter, successive extensions, each for a period not to
exceed two years, may be made by agreement between the Company and the
Manager, with the approval of a majority of the Unaffiliated Directors.
The Manager will be primarily involved in three activities: (i)
underwriting, originating and acquiring Mortgage Loans and other real
estate related assets; (ii) asset/liability management, financing, hedging,
management and disposition of mortgage assets, including credit and
prepayment risk management; and (iii) 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 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 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 will
perform such services and activities relating to the Mortgage Assets and
operations of the Company as may be appropriate, including:

o providing a complete program of investing and reinvesting the
capital and assets of the Company in pursuit of its investment
objective and in accordance with policies adopted by the Company's
Board of Directors from time to time;

o 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;

o assisting the Company in developing criteria for mortgage asset
purchase commitments that are specifically tailored to the Company's
investment objectives and making available to the Company its
knowledge and experience with respect to mortgage assets and other
real estate related assets;

o counseling the Company in connection with policy decisions made
by the Board of Directors;

o 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;

o maintenance of an exemption from regulation as an investment
company;

o 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;

o arranging for the issuance of MBS from pools of Mortgage Loans
owned by the Company;

o 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;

o 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;

o 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;

o contracting, as necessary, with third parties for master and
special servicing of assets acquired by the Company;

o 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;

o causing the Company to qualify to do business in all applicable
jurisdictions;

o causing the Company to retain qualified accountants and legal
counsel to assist in developing appropriate accounting procedures,
compliance procedures and testing systems and to conduct quarterly
compliance reviews;

o assisting the Company in complying with all 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;

o assisting the Company in making required tax filings and
reports and maintaining its status as a REIT, including soliciting
stockholders for required information to the extent provided in the
REIT Provisions of the Code;

o 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

o using all reasonable efforts to cause the Company to comply
with all applicable laws.

Upon termination of the Management Agreement by the Company, the
Company is obligated to pay the Manager what could be a substantial
termination fee which will be determined by independent appraisal (other
than in the case of termination by the Company for cause). The Company may
terminate, or decline to renew the term of, the Management Agreement
without cause at any time after the first two years upon 60 days written
notice by a majority vote of the Unaffiliated Directors; provided that the
Company shall pay the Manager a termination fee determined by independent
appraisal. Such appraisal is to be conducted by a nationally-recognized
appraisal firm mutually agreed upon by the Company and the Manager. If the
Company and the Manager are unable to agree upon an appraisal firm, then
each of the Company and the Manager is to choose an independent appraisal
firm to conduct an appraisal. In such event, (i) if the appraisals
prepared by the two appraisers so selected are the same or differ by an
amount that does not exceed 20% of the higher of the two appraisals, the
termination fee is to be deemed to be the average of the appraisals as
prepared by each party's chosen appraiser, and (ii) if the two appraisals
differ by more than 20% of such higher amount, the two appraisers together
are to select a third appraisal firm to conduct an appraisal. If the two
appraisers are unable to agree as to the identity of such third appraiser,
either of the Manager and the Company may request that the American
Arbitration Association ("AAA") select the third appraiser. The
termination fee then is to be an amount determined by such third appraiser,
but in no event less than the lower of the two initial appraisals or more
than the higher of such two initial appraisals.

The Management Agreement may not be assigned (within the meaning of
the Investment Advisers Act of 1940 and the rules thereunder) by either
party without the consent of the other party.

MANAGEMENT COMPENSATION

RECIPIENT PAYOR AMOUNT

Manager Company Base management fee equal to a percentage of the
Average Invested Assets by rating category of the
Company(1)

Manager Company Incentive compensation based on the amount, if
any, by which the Company's Funds From Operations
and certain net gains exceed a hurdle rate(2)

Manager Company Out-of-pocket expenses of Manager paid to third
parties in connection with due diligence

____________________

(1) The base management fee is equal to 1% per annum of Average Invested
Assets rated lower than BB- or not rated, 0.75% of Average Invested
Assets rated BB- to BB+, and 0.5% of Average Invested Assets rated
above BB+.

(2) A detailed explanation of the calculation of the incentive
compensation is provided below.

(3) The Manager may engage PNC, Midland or unaffiliated third parties to
conduct due diligence with respect to potential portfolio investments.
Accordingly, a portion of the out-of-pocket expenses will be paid to
PNC or Midland in such capacities. The contract for such engagement
will be conducted at arm's length. PNC and Midland will be paid fees
and out-of-pocket expenses as would customarily be paid to
unaffiliated third parties for such services.

The term "Average Invested Assets" for any period means the average
of the aggregate book value of the assets of the Company, including the
assets of all of its direct and indirect subsidiaries, before reserves for
depreciation or bad debts or other similar noncash reserves, computed by
taking the daily average of such values during such period. (i) Average
Invested Assets with a rating of less than BB- or not rated means, for any
quarter, the Average Invested Assets in such quarter which have received a
credit rating of less than BB- from Standard & Poor's Corporation ("S&P")
or less than [ ] from Moody's Investors Service, Inc. ("Moody's") or
have received an equivalent rating from a NRSRO or which have not been
rated by either Moody's, S&P or a NRSRO and are not guaranteed by the U.S.
government or any agency or instrumentality thereof, (ii) Average Invested
Assets with a rating of BB- to BB+ shall mean the Average Invested Assets
which have received a credit rating of BB- to BB+ from S&P or [ to
] from Moody's or have received an equivalent rating from a NRSRO and
which are not covered by clause (i) above, and (iii) Average Invested
Assets with a credit rating above BB+ shall mean the Average Invested
Assets which have received a credit rating above BB+ from S&P or above [
] from Moody's or have received an equivalent rating from a NRSRO and which
are not covered by clause (i) or (ii) above or which are not rated but are
guaranteed by the U.S. government or any agency or instrumentality thereof.
The Manager will not receive any management fee for the period prior to the
sale of the shares of Common Stock offered hereby. The base management fee
is intended to compensate the Manager, among other things, for its costs in
providing management services to the Company.

The Manager will be entitled to receive incentive compensation for
each fiscal quarter in an amount equal to the product of (A) 25% of the
dollar amount by which (1)(a) Funds from Operations of the Company (before
the incentive fee) per share of Common Stock (based on the weighted average
number of shares outstanding) plus (b) gains (or minus loses) from debt
restructuring and sales of property per share of Common Stock (based on the
weighted average number of shares outstanding), exceed (2) an amount equal
to (a) the weighted average of the price per share of the initial offering
and the prices per share of any secondary offerings by the Company
multiplied by (b) the Ten-Year U.S. Treasury Rate plus three percent per
annum (expressed as a quarterly percentage) multiplied by (B) the weighted
average number of shares of Common Stock outstanding during such quarter.
Notwithstanding the foregoing, no payment of any portion of the incentive
compensation that is attributable to net capital gains of the Company prior
to the end of the first full fiscal quarter of the Company's operations
following any minimum calculation period longer than a quarter required by
Rule 205-3 of the Investment Advisers Act of 1940 at the time of such
calculation, will accrue or be payable until completion of such fiscal
quarter, at which time the cumulative net capital gains of the Company
through the end of such quarter will be computed and incentive compensation
will be paid on such net gains at the rate provided above and after which
time the net capital gains includible above for each quarter will be the
excess of such net capital gains for such minimum calculation period
through the end of such quarter (the "Total Period") over the net capital
gains (if any) for the portion of the Total Period other than such quarter.
For any period less than a quarter during which this Agreement is in
effect, the incentive fee will be prorated according to the proportion
which such period bears to a full quarter of 90, 91 or 92 days, as the case
may be. "Funds From Operations" as defined by NAREIT means net income
(computed in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on
real estate assets, and after adjustments for unconsolidated partnerships
and joint ventures. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity or ability
to make distributions. As used in calculating the Manager's compensation,
the term "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 constant maturities 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
will be the arithmetic average of the per annum average yields to
maturities, 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.

The ability of the Company to generate Funds From Operations in excess
of the Ten Year U.S. Treasury Rate, and of the Manager to earn the
incentive compensation described in the preceding paragraph, is dependent
upon the level of credit losses, 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 control.

The Manager is expected to use the proceeds from its base management
fee and incentive compensation in part to pay compensation to its officers
and employees who, notwithstanding that certain of them also are officers
of the Company, will receive no cash compensation directly from the
Company.

The Company expects to rely primarily on the facilities, personnel and
resources of the Manager to conduct its operations. The Manager will be
reimbursed for (or charge the Company directly for) the Manager's costs and
expenses in employing third-parties to perform due diligence tasks on
assets purchased or considered for purchase by the Company. Further, the
Manager will be reimbursed for any expenses incurred in contracting with
third parties for the master or special servicing of assets acquired by the
Company. The manager may engage PNC or Midland to conduct due diligence
with respect to potential portfolio investments and to provide other
services. Accordingly, a portion of the out-of-pocket expenses will be
paid to PNC or Midland in such capacities. The contract for such
engagement will be conducted at arm's length and PNC and Midland will be
paid fees and out-of-pocket expenses as would customarily be paid to
unaffiliated third parties for such services. Such arrangements may also
be made using an income sharing arrangement such as a joint venture.
Expense reimbursement will be made quarterly.

The management fees are payable in arrears. The Manager's base and
incentive fees and reimbursable costs and expenses will be calculated by
the Manager within 45 days after the end of each quarter, and such
calculation will be promptly delivered to the Company. The Company is
obligated to pay such fees, costs and expenses within 60 days after the end
of each fiscal quarter. If requested by the Manger, the Company will make
advance payments of the base management fee as often as semi-monthly at the
rate of 75% of such fee estimated by the Manager.

The Company has adopted a 1998 Stock Option Plan. The Manager and the
directors, officers and any employees of the Company and the Manager may be
granted options under the Company's 1998 Stock Option Plan. See
"Management of the Company -- Stock Options."

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 $ . This
payment will not be subject to the limitation on expenses to be borne by
the Company as described in the paragraph below.

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. The operating expenses
required to be borne by the Manager include costs and expenses of its
officers and employees and any overhead incurred in connection with its
duties under the Management Agreement, the cost of office space and
equipment required for the Company's day-to-day operations and the costs of
any salaries or directors fees of any officers or directors of the Company
who are affiliated persons of the Manager except that the Board of
Directors of the Company may approve reimbursement to the Manager of the
Company's pro rata portion of the salaries, bonuses, health insurance,
retirement benefits and similar employment costs for the time spent on
Company operations and administration other than for the provision of
investment advisory services. The expenses that will be paid by the
Company will include (but not necessarily be limited to) issuance and
transaction costs incident to the acquisition, disposition and financing of
investments, legal and auditing fees expenses, the compensation and
expenses of the Company's Unaffiliated Directors, the costs of printing and
mailing proxies and reports to stockholders, costs incurred by employees of
the Manager for travel on behalf of the Company, costs associated with any
computer software or hardware that is used solely for the Company, costs to
obtain liability insurance to indemnify the Company's directors and
officers, the Manager and its employees and directors and the Underwriters,
and the compensation and expenses of the Company's custodian and transfer
agent, if any. The Company will also be required to pay all expenses
incurred in connection with due diligence, the accumulation of Mortgage
Loans, the master and special servicing of Mortgage Loans, the issuance and
administration of MBS from pools of Mortgage Loans or otherwise, the
raising of capital, incurrence of debt, the acquisition of assets, interest
expenses, taxes and license fees, non-cash costs, litigation, the base and
incentive management fee and extraordinary or non-recurring expenses. Such
services may be provided to the Company by Affiliates of the Manager if the
Manager believes such services are of comparable or superior quality to
those provided by third parties and can be provided at comparable cost.
The Board of Directors will periodically review the Company's expenses
levels, the division of expenses between the Company and the Manager and
reimbursements of expenses advanced by the Manager.

The Company is subject to conflicts of interest involving the Manager
and its Affiliates because, among other reasons, (i) the Manager and its
Affiliates are permitted to purchase mortgage assets for their own account
and to advise accounts of other clients, and many investments appropriate
for the Company also will be appropriate for these accounts and (ii) the
incentive fee, which is based on income of the Company, may create an
incentive for the Manager to recommend investments with greater income
potential, which generally are riskier or more speculative, than would be
the case if its fee did not include a "performance" component.

The Company is also subject to conflicts of interest because of the
expected purchase of substantial assets from PNC and its Affiliates. Many
of such assets do not have a readily determinable fair market value and
independent valuations may not be sought. Nevertheless, the Company
intends to adopt operating policies to minimize the effect of such
conflicts. These policies will require that any acquisition of assets from
PNC or its Affiliates be made for fair market value. The Unaffiliated
Directors will adopt a policy requiring documentation of the fair market
value of all affiliated purchases. The policy will require the reporting
of all such documentation quarterly. In addition, the Board of Directors
intends to approve certain operating and investing guidelines which may be
amended from time to time in response to market conditions, but only with
the approval of a majority of the Unaffiliated Directors. The Unaffiliated
Directors are likely to rely substantially on information and analysis
provided by the Manager.

Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and
will not be responsible for any action of the Board of Directors in
following or declining to follow its advice or recommendations. The
Manager and its directors and officers will not be liable to the Company,
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
Company has agreed to indemnify the Manager and its directors and officers
with respect to all expenses, losses, damages, liabilities, demands,
charges and claims arising from acts of the Manager not constituting bad
faith, willful misconduct, gross negligence or reckless disregard of
duties, performed in good faith in accordance with and pursuant to the
Management Agreement.

The Company has agreed that if it terminates the Management Agreement
without cause or the Board of Directors fails to approve a continuation of
the Management Agreement, or the Company engages another person to manage a
portion of its assets or to manage assets internally with personnel other
than those previously employed by the Manager, the Manager will be entitled
to receive a termination fee in an amount equal to the fair market value of
the Management Agreement (without giving effect to any termination and
assuming it is renewed in accordance with its terms), to be determined in
accordance with the provisions of the Management Agreement.

The Manager and its employees and the Unaffiliated Directors may also
receive Stock options pursuant to the Company's 1998 Stock Option Plan.
See "Management of the Company Stock Options."

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 MBS, 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. There can be no assurance that the Company
would be able to recover any damages for claims it may have against the
Manager. Although certain officers and directors of the Manager are also
officers and directors of the Company, and therefore have fiduciary duties
to the Company and its stockholders in that capacity, the Manager and the
officers and directors of the Manager, in their capacities as such, have no
fiduciary duties to the Company or its stockholders.

The Company has agreed to indemnify the Manager and its directors,
officers, employees and controlling persons with respect to all expenses,
losses, damages, liabilities, demands, charges and claims arising from any
acts or omissions of the Manager or its employees made in good faith in the
performance of the Manager's 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. See "Risk
Factors -- Conflicts of Interest."

INITIAL INVESTMENTS

GENERAL

The Company intends to acquire the Initial Investments consisting of
certain MBS Interests, which are described below, for an aggregate cash
price equal to approximately $ million plus accrued interest ( % of
the expected net proceeds of this Offering). The MBS Interests include
various classes issued pursuant to the LB Commercial Mortgage Trust,
Commercial Mortgage Pass-Through Certificates (the "Certificates"), Series
1998-C1 transaction, which is expected to close in March 1998.

The purchase prices to be paid by the Company for the Initial
Investments were derived by considering a number of factors, including the
amount and timing of potential net cash flows, the range of possible
returns, and the risks associated with such Initial Investments, including
the risk that the ultimate return will be significantly affected by losses,
if any, realized on the mortgage loans underlying the MBS Interests
included in the Initial Investments, and other factors that are not
controlled or controllable by the Company, such as prepayment experience on
the underlying mortgage loans. These factors may result in a below market
rate of return or a loss on the purchase prices paid for the Initial
Investments in certain situations. See "Risk Factors Risks Related to
Investments in MBS Interests Subordinated MBS Interests are Subject to
Greater Credit Risks Than More Senior Classes."

The Company believes that the descriptions of the Initial Investments
set forth below are summaries of the material terms of the Initial
Investments. They have been derived from the Offering Memorandum for the
MBS Interests, portions of which are attached as Annex A (the "Offering
Memorandum"). Information with respect to the MBS Interests, which is
peculiarly within the control of the trustee and issuer of the MBS
Interests, has not been independently confirmed by the Company, the Manager
or the Underwriters, and is all the information on the subject that the
Company possesses or can acquire without unreasonable effort or expense.
The Offering Memorandum incorporates and includes therein a registration
statement, file number 33-96378, filed by the Depositor with the SEC with
respect to certain Classes of Certificates of such series, although not the
Classes to be purchased by the Company. Such registration statement is
available at the public reference facilities of the SEC at 450 Fifth
Street, N.W., Washington, D.C., and from the SEC's Website at www.sec.gov.

LB SERIES 1998-C1, CLASSES F, G, H, J, K, L AND M

The Initial Investments include certain classes of LB Commercial
Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 1998-
C1, which will be issued in March 1998. The LB Investments consist of
Classes F, G, H, J, K, L and M. The LB Investments represent 100% of the
outstanding principal balance of each Class.

The Certificates, in the aggregate, will represent the entire
undivided beneficial ownership interest in a trust fund (the "Trust Fund")
to be established by Structured Asset Securities Corporation (the
"Depositor"), that is expected to consist primarily of a segregated pool
(the "Mortgage Pool") of 261 conventional monthly pay, commercial and
multifamily, fixed rate mortgage loans (the "LB Mortgage Loans") having the
characteristics described herein and in Appendix A hereto. As of February
1, 1998 (the "Cut-off Date"), the LB Mortgage Loans had an aggregate
principal balance (the "Initial Pool Balance") of approximately
$1,775,167,073, after application of all payments of principal due on or
before such date, whether or not received. The LB Investments have not
been registered under the Securities Act.

The LB Investments will be subordinate to the publicly registered
Certificates, as indicated in the table set forth below, and each Class of
LB Investment will be subordinate to the Class LB Investment listed above
it on such table.

The yield to maturity on each Class of Certificates will depend on,
among other things, the rate and timing of principal payments (including by
reason of prepayments, defaults and liquidations) on the LB Mortgage Loans.
See "Yield and Maturity Considerations Weighted Average Life" herein and
in Appendix A.

The following table shows each Class of Certificates issued as part of
LB Series 1998-C1, including the LB Investments, as well as other Classes
of Certificates that are not being sold to the Company. Only Classes F,
G, H, J, K, L and M are being sold to the Company. None of such Classes
have been rated by any rating agency.

Initial Percent of Weighted Cash Flow
Certificate Initial Pool Credit Pass-Through Average Life or Principal
Class Balance (1) Balance (1) Support (2) Rate (years) (3) Window (3)

Class A-1 $275,000,000 15.5% 29.50% % 4.33 03/98-10/04
Class A-2 $330,000,000 18.6% 29.50% % 7.75 10/04-08/07
Class A-3 $646,492,000 36.4% 29.50% % 9.71 08/07-01/08
Class B $ 88,759,000 5.0% 24.50% % 9.85 01/08-01/08
Class C $ 88,758,000 5.0% 19.50% % 9.90 01/08-09/08
Class D $ 93,196,000 5.2% 14.25% % 12.59 09/08-08/12
Class E $ 35,504,000 2.0% 12.25% % 14.61 08/12-11/12
Class IO N/A(4) N/A N/A - N/A 03/98-02/28
Class F $ 53,255,000 3.0% 9.25% % 14.75 11/12-01/13
Class G $ 35,503,000 2.0% 7.25% % 14.85 01/13-01/13
Class H $ 17,752,000 1.0% 6.25% % 14.85 01/13-01/13
Class J $ 44,379,000 2.5% 3.75% % 15.21 01/13-11/14
Class K $ 17,751,000 1.0% 2.75% % 17.57 11/14-08/16
Class L $ 17,752,000 1.0% 1.75% % 19.15 08/16-11/17
Class M $ 31,066,073 1.8% - % 23.23 11/17-02/28
</TABLE>

(1) Subject to a permitted variance of plus or minus 1%.

(2) Represents initial aggregate Certificate Balance of Classes A-1, A-2,
A-3, B, C, D, E, F, G, H, J, K, L and M (the "Sequential Pay
Certificates") that are subordinate to the indicated Class (expressed
as a percentage of the Initial Pool Balance).

(3) Based on 0% Constant Prepayment Rate ("CPR") (except for the ARD Loans
(as defined below), which are assumed to pay in full on their
respective Anticipated Repayment Dates (as defined herein)) and the
other assumptions set forth under "Yield and Maturity Considerations."
The CPR model represents an assumed constant annual rate of prepayment
each month, expressed as a per annum percentage of the then scheduled
principal balance of one or more mortgage loans. An ARD Loan is a
mortgage loan that provides that if it is not paid in full as of a
date specified in the related mortgage note (the "Anticipated
Repayment Date"), then interest will accrue thereon at an increased
mortgage rate and the borrower will be required to make substantially
increased payments.

(4) The Class IO Certificates will not have a specified Certificate
Balance nor will they entitle the holders thereof to receive
distributions of principal.

Structure and Subordination. Each Class of the LB Investments is
subordinated in right of payments of principal and interest and protects
the more senior Classes from losses on the related LB Mortgage Loans.
Principal distributions on the securities are applied sequentially, with no
principal paid to a Class until the outstanding principal balance of the
more senior Classes are reduced to zero. In addition, as losses are
incurred on the LB Mortgage Loans, the principal balance of Class M, then
Class L, then Class K, then Class J, then Class H, then Class G and then
Class F would be reduced, until the outstanding principal balance of each
such Class had been reduced to zero.

LB Mortgage Loans. The 261 LB Mortgage Loans which underlie the
Certificates, are conventional, monthly pay mortgage loans with an
aggregate principal amount as of the Cut-off Date of $1,775,167,073,
subject to a variance of plus or minus 5.0% The LB Mortgage Loans are
secured by first liens on commercial and multifamily properties. All of
the LB Mortgage Loans were either originated by an affiliate of one of the
Underwriters (the "Mortgage Loan Seller") or acquired by it in connection
with its commercial and multifamily mortgage loan conduit program. All of
the LB Mortgage Loans were originated in 1997 or 1998. None of the LB
Mortgage Loans was 30 days or more delinquent in respect of any scheduled
payment of principal and interest as of the Cut-off Date, and no LB
Mortgage Loan has been more than 30 days delinquent in respect of any
schedule payment of principal and interest during the12 months preceding
the Cut-off Date. The information regarding the LB Mortgage Loans contained
herein has been derived from Appendix A hereto and reference is made thereto
for a more complete description of the LB Mortgage Loans.

CERTAIN CHARACTERISTICS OF THE LB MORTGAGE LOANS

Set forth below are the number of LB Mortgage Loans, and the
approximate percentage of the Initial Pool Balance represented by such LB
Mortgage Loans, that are secured by Mortgaged Properties operated for each
indicated purpose:

PERCENTAGE OF
NUMBER OF INITIAL POOL
PROPERTY TYPE MORTGAGE LOANS BALANCE

Retail . . . . . . . . . . . 103 44.8%
Multifamily . . . . . . . . . 75 24.8%
Office . . . . . . . . . . . 50 16.3%
Hospitality . . . . . . . . . . 9 6.3%
Industrial/Warehouse . . . . 16 5.5%
Health Care . . . . . . . . . . 3 1.3%
Self Storage . . . . . . . . . 3 0.6%
Mobile Home Park . . . . . . . 1 0.2%
Parking Garage . . . . . . . 1 0.1%

The Mortgaged Properties are located throughout 36 states. Set forth
below are the number of LB Mortgage Loans, and the approximate percentage
of the Initial Pool Balance represented by such LB Mortgage Loans, that are
secured by Mortgage Properties located in the states with concentrations of
Mortgage Loans above 5.0% (based on Cut-off Date Balance):

PERCENTAGE OF
NUMBER OF INITIAL POOL
STATE MORTGAGE LOANS BALANCE

Texas . . . . . . . . . 37 10.2 %
Florida . . . . . . . . 31 9.4%
New York . . . . . . . 19 8.4%
California . . . . . . 21 8.0%
Maryland . . . . . . . . 7 5.7%
Pennsylvania . . . . . 9 5.7%

All of the LB Mortgage Loans bear interest at annualized rates
("Mortgage Rates") that will remain fixed for their respective remaining
loan terms, except that, as described below, the ARD Loans will accrue
interest after their respective Anticipated Repayment Dates at a rate that
is generally equal to the greater of (i) two or more percentage points
higher than their respective Mortgage Rates and (ii) two or more percentage
points higher than the then current applicable treasury rate. As used
herein, the term "Mortgage Rate" does not include the incremental increase
in the rate at which interest may accrue on any ARD Loan after such date.
No LB Mortgage Loan permits negative amortization or (except for the ARD
Loans) the deferral of accrued interest. Scheduled payments of principal
and/or interest on the LB Mortgage Loans ("Monthly Payments") are due
monthly on the first day of each month.

One hundred seventy-seven (177) of the LB Mortgage Loans (the "Balloon
Loans"), representing 62.3% of the Initial Pool Balance, provide for
Monthly Payments based on amortization schedules significantly longer than
their respective remaining terms to maturity. As a result, such LB
Mortgage Loans will have substantial principal amounts due and payable
(each such amount, together with the corresponding payment of interest, a
"Balloon Payment) on their respective scheduled maturity dates, unless
prepaid prior thereto. Sixty-one (61) of the LB Mortgage Loans,
representing 30.1% of the Initial Pool Balance, are ARD Loans. The
remaining 23 LB Mortgage Loans, representing 7.6% of the Initial Pool
Balance, are self-amortizing.

As of the Cut-Off Date, all of the LB Mortgage Loans restrict or
prohibit voluntary principal prepayments. One hundred seventy-nine (179)
of the LB Mortgage Loans (the "Defeasance Loans"), representing 71.5% of
the Initial Pool Balance, provide the holder of the Mortgage, following
notice from the borrower that the borrower intends to prepay the Mortgage
Loan as permitted by the related Mortgage Note, may require the borrower,
in lieu of prepayment, to pledge to such holder "Defeasance Collateral" and
thereupon obtain a release of the Mortgaged Property from the lien of the
related Mortgage. In general, "Defeasance Collateral" is required to
consist of direct, non-callable United States Treasury obligations that
provide for payments prior, but as close as possible, to all successive due
dates (including the scheduled maturity date), with each such payment being
equal to or greater than (with any excess to be returned to the borrower)
than the Monthly Payment (including, in the case of the scheduled maturity
date, and Balloon Payment), due on such date.

Set forth below is a certain information regarding the LB Mortgage
Loans and the Mortgaged Properties as of the Cut-Off Date (all weighted
averages set forth below are based on the Cut-Off Date Balances of the
respective LB Mortgage Loans). Such information is more fully described,
and additional information regarding the Mortgage Loans and the Mortgaged
Properties is set forth, in the tables under "Description of the Mortgage
Pool Additional Mortgage Loan Information" in Annex A hereto:

Minimum Cut-off Date Balance . . . . . $613,738
Maximum Cut-off Date Balance . . . . . $62,467,513
Average Cut-off Date Balance . . . . . $6,801,406
Minimum Mortgage Rate . . . . . . . . . 6.97%
Maximum Mortgage Rate . . . . . . . . . 9.170%
Weighted Average Mortgage Rate . . . . 7.603%
Minimum Remaining Term of Maturity (months). . . 58
Maximum Remaining Term of Maturity (months). . . 360
Weighted Average Remaining Term to Maturity (months). . . 131
Minimum Remaining Amortization Term (months). . . . . . . 189
Maximum Remaining Amortization Term (months) . . . . . . 360
Weighted Average Remaining Amortization Term (months) . . 338
Minimum Cut-off Date DSC Ratio . . . . 1.19x
Maximum Cut-off Date DSC Ratio . . . . 2.13x
Weighted Average Cut-off Date DSC Ratio. . . . . 1.34x
Minimum Cut-off Date LTV Ratio . . . . 28.0%
Maximum Cut-off Date LTV Ratio . . . . 80.0%
Weighted Average Cut-off Date LTV Ratio. . . . 73.2%
Minimum Maturity Date LTV Ratio(1) . . 8.9%
Maximum Maturity Date LTV Ratio(1) . . 76.0%
Weighted Average Maturity LTV Ratio(1). . . 62.1%

___________________
(1) Applies only to Balloon Loans.

The LB Mortgage Loans will be serviced by GMAC Commercial Mortgage
Corporation ("GMACCM"), as master servicer and special servicer. The
Company will, by virtue of its ownership of the LB Investments, have the
right to replace the special servicer and to select a representative from
whom the special servicer will seek advice and approval and take direction
under certain circumstances.

The LB Investments have not been registered under the Securities Act
or any state securities laws, and, accordingly, transfer of the LB
Investments is restricted. Moreover, the LB Investments may not be
transferred to an ERISA Plan or ERISA Plan investor except in certain
limited circumstances. As a result, there is no liquid market for the LB
Investments.

YIELD CONSIDERATIONS RELATED TO THE LB INVESTMENTS

[to be inserted from Offering Memorandum, when available]

FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of the material federal income tax
consequences that may be relevant to the Company and to a prospective
holder of the Common Stock. Skadden, Arps, Slate, Meagher & Flom LLP
("Counsel") has acted as counsel to the Company and has reviewed this
summary and has rendered an opinion that the descriptions of the law and
the legal conclusions contained herein are correct in all material
respects, and the discussions hereunder fairly summarize the material
federal income tax consequences to the Company and a holder of the Common
Stock. The discussion contained herein does not address all aspects of
taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of
stockholders (including insurance companies, tax-exempt organizations
(except as discussed below), financial institutions or broker-dealers and,
except as discussed below, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment
under the federal income tax laws.

The statements in this discussion and the opinion of Counsel are based
on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, existing administrative rulings and practices of the
Internal Revenue Service (the "IRS"), and judicial decisions. No assurance
can be given that future legislative, judicial, or administrative actions
or decisions, which may be retroactive in effect, will not affect the
accuracy of any statements in this Prospectus with respect to the
transactions entered into or contemplated prior to the effective date of
such changes.

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

TAXATION OF THE COMPANY

The Company plans to make an election to be taxed as a REIT under the
Code, commencing with its taxable year ending on December 31, 1998.

The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth
the material aspects of the Code sections and Treasury Regulations that
govern the federal income tax treatment of a REIT and its stockholders.
The discussion is qualified in its entirety by the applicable Code
provisions, Treasury Regulations promulgated thereunder, and administrative
and judicial interpretations thereof, all of which are subject to change
prospectively or retroactively.

Counsel has advised the Company in connection with the Offering and
the Company's election to be taxed as a REIT. Counsel has provided the
Company with an opinion that, provided the Company makes a timely election
to be taxed as a REIT, the Company will be organized in conformity with the
requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT under the REIT Provisions of the Code. Investors should
be aware, however, that opinions of counsel are not binding upon the IRS or
any court. It must be emphasized that Counsel's opinion is based on and is
conditioned upon certain assumptions and representations made by the
Company as to factual matters, including assumptions and representations
regarding the nature of the Company's properties and the future conduct of
its business in accordance with the descriptions of the requirements to
qualify as a REIT as described herein. The Company's qualification and
taxation as a REIT depends upon its ability to meet, through actual annual
operating results, asset ownership, distribution levels, and diversity of
Stock ownership, and the various qualification tests imposed under the Code
discussed below. Counsel will not review the Company's compliance with
those tests on a continuing basis. Accordingly, no assurance can be given
that the actual results of the Company's operations for any particular
taxable year will satisfy such requirements. For a discussion of the tax
consequences of failure to qualify as a REIT, see "-- Failure to Qualify."

If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income tax on its Net Income that is
distributed currently to its stockholders. This treatment substantially
eliminates the "double taxation" (i.e., taxation at both the corporate and
stockholder levels) that generally results from an investment in a
corporation. However, the Company will be subject to federal income tax in
the following circumstances. First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its
undistributed items of tax preference, if any. Third, if the Company has
(i) net income from the sale or other disposition of "foreclosure property"
that is held primarily for sale to customers in the ordinary course of
business or (ii) other nonqualifying income from foreclosure property, it
will be subject to tax at the highest corporate rate on such income.
Fourth, if the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property (other
than foreclosure property) held primarily for sale to customers in the
ordinary course of business), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), and nonetheless has
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the gross income
attributable to the greater of the amount by which the Company fails the
75% or 95% gross income test, multiplied by a fraction intended to reflect
the Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year (other than long-term capital gains that the Company
elects to retain and pay the tax thereon), and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4%
excise tax on the excess of such required distribution over the amounts
actually distributed. To the extent that the Company elects to retain and
pay income tax on its net capital gain, such retained amounts will be
treated as having been distributed for purposes of the 4% excise tax.
Seventh, if the Company acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a merger or
other transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in
the hands of the C corporation and the Company recognizes gain on the
disposition of such asset during the 10-year period beginning on the date
on which it acquired such asset, then to the extent of such asset's "built-
in-gain" (i.e., the excess of the fair market value of such asset at the
time of acquisition by the Company over the adjusted basis in such asset at
such time), the Company will be subject to tax at the highest regular
corporate rate applicable (as provided in Treasury Regulations that have
not yet been promulgated). The results described above with respect to the
tax on "built-in-gain" assume that the Company will elect pursuant to IRS
Notice 88-19 to be subject to the rules described in the preceding sentence
if it were to make any such acquisition. See "Proposed Tax Legislation."
Finally, the Company will be subject to tax at the highest marginal
corporate rate on the portion of any Excess Inclusion derived by the
Company from REMIC Residual Interests equal to the percentage of the Stock
of the Company held by the United States, any state or political
subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, any
other tax-exempt organization (other than a farmer's cooperative described
in Section 521 of the Code) that is exempt from taxation under the
unrelated business taxable income provisions of the Code, or any rural
electrical or telephone cooperative (each, a "Disqualified Organization").
Any such tax on the portion of any Excess Inclusion allocable to Stock of
the Company held by a Disqualified Organization will reduce the cash
available for distribution from the Company to all stockholders.

REQUIREMENTS FOR QUALIFICATION

The Code defines a REIT as a corporation, trust, or association (i)
that is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (iii) that would be taxable as a
domestic corporation, but the REIT Provisions of the Code; (iv) that is
neither a financial institution nor an insurance company subject to certain
provisions of the Code; (v) the beneficial ownership of which is held by
100 or more persons; (vi) not more than 50% in value of the outstanding
shares of which is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the
last half of each taxable year (the "5/50 Rule"); (vii) that makes an
election to be a REIT (or has made such election for a previous taxable
year) and satisfies all relevant filing and other administrative
requirements established by the Service that must be met in order to elect
and maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes and complies with the recordkeeping requirements of the
Code and Treasury Regulations promulgated thereunder; and (ix) that meets
certain other tests, described below, regarding the nature of its income
and assets. Conditions (i) to (iv), inclusive, must be met during the
entire taxable year and condition (v) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable
year of less than 12 months. Conditions (v) and (vi) will not apply until
after the first taxable year for which an election is made by the Company
to be taxed as a REIT. For purposes of determining Stock ownership under
the 5/50 Rule, a supplemental unemployment compensation benefits plan, a
private foundation, or a portion of a trust permanently set aside or used
exclusively for charitable purposes generally is considered an individual.
A trust that is a qualified trust under Code Section 401(a), however,
generally is not considered an individual and beneficiaries of such trust
are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule.

Prior to the consummation of the Offering, the Company did not satisfy
conditions (v) and (vi) in the preceding paragraph. The Company
anticipates issuing sufficient Common Stock with sufficient diversity of
ownership pursuant to the Offering to allow it to satisfy requirements (v)
and (vi). In addition, the Charter provides for restrictions regarding the
transfer of the Common Stock that are intended to assist the Company in
continuing to satisfy the share ownership requirements described in clauses
(v) and (vi) above. See "Description of Capital Stock--Restrictions on
Transfer."

The Code provides that a corporation that is a "Qualified REIT
Subsidiary" shall not be treated as a separate corporation, and all assets,
liabilities, and items of income, deduction, and credit of a "Qualified
REIT Subsidiary" shall be treated as assets, liabilities, and items of
income, deduction, and credit of the REIT. A "Qualified REIT Subsidiary"
is a corporation, all of the capital Stock of which is owned by the REIT.
Thus, in applying the requirements described herein, any "Qualified REIT
Subsidiaries" of the Company will be ignored, and all assets, liabilities,
and items of income, deduction, and credit of such subsidiaries will be
treated as assets, liabilities, and items of income, deduction, and credit
of the Company.

In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the gross income of the partnership attributable to such share. In
addition, the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income and asset tests described
below.

INCOME TESTS. In order for the Company to qualify and to maintain its
qualification as a REIT, two requirements relating to the Company's gross
income must be satisfied annually. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must consist of defined types of income derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and interest on obligations
secured by mortgages on real property or on interests in real property) or
temporary investment income. Second, at least 95% of the Company's gross
income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property, mortgages on real
property, or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of Stock or securities, or
from any combination of the foregoing.

The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in
whole or in part on net income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term
"interest" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. In addition, an amount received or
accrued generally will not be excluded from the term "interest" solely by
reason of being based on the income or profits of a debtor if the debtor
derives substantially all of its gross income from the related property
through the leasing of substantially all of its interests in the property,
to the extent the amounts received by the debtor would be characterized as
rents from real property if received by a REIT.

Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75%
gross income test. Any amount includible in gross income with respect to a
regular or residual interest in a REMIC generally is treated as interest on
an obligation secured by a mortgage on real property. If, however, less
than 95% of the assets of a REMIC consists of real estate assets
(determined as if the Company held such assets), the Company will be
treated as receiving directly its proportionate share of the income of the
REMIC. In addition, if the Company receives interest income with respect
to a mortgage loan that is secured by both real property and other property
and the highest principal amount of the loan outstanding during a taxable
year exceeds the fair market value of the real property on the date the
Company purchased the mortgage loan, the interest income will be
apportioned between the real property and the other property, which
apportionment may cause the Company to recognize income that is not
qualifying income for purposes of the 75% gross income test.

In general, the interest, original issue discount, and market discount
income that the Company derives from its investments in MBS Interests, and
Mortgage Loans will be qualifying interest income for purposes of both the
75% and the 95% gross income tests, except to the extent that less than 95%
of the assets of a REMIC in which the Company holds an interest consists of
real estate assets (determined as if the Company held such assets), and the
Company's proportionate share of the income of the REMIC includes income
that is not qualifying income for purposes of the 75% and 95% gross income
tests. In some cases, however, the loan amount of a Mortgage Loan may
exceed the value of the real property securing the loan, which will result
in a portion of the interest income from the loan being classified as
qualifying income for purposes of the 95% gross income test, but not for
purposes of the 75% gross income test. It is also possible that, in some
instances, the interest income from a Distressed Mortgage Loan may be based
in part on the borrower's profits or net income, which generally will
disqualify the income from the loan for purposes of both the 75% and the
95% gross income tests.

The Company may acquire Construction Loans or Mezzanine Loans that
have shared appreciation provisions. To the extent interest from a loan
that is based on the cash proceeds from the sale of property constitutes a
"shared appreciation provision" (as defined in the Code), income
attributable to such participation feature will be treated as gain from the
sale of the secured property, which generally is qualifying income for
purposes of the 75% and 95% gross income tests.

The Company also may employ, to the extent consistent with the REIT
Provisions of the Code, other forms of securitization under which a "sale"
of an interest in the Mortgage Loans occurs, and a resulting gain or loss
is recorded on the Company's balance sheet for accounting purposes at the
time of sale. In a "sale" securitization, only the net retained interest
in the securitized Mortgage Loans would remain on the Company's balance
sheet. The Company may elect to conduct certain of its securitization
activities, including such sales, through one or more taxable subsidiaries
or through "Qualified REIT Subsidiaries", as defined under the REIT
Provisions of the Code, formed for such purpose. To the extent consistent
with the REIT Provisions of the Code, such entity would elect to be taxed
as a Real Estate Mortgage Investment Conduit ("REMIC") or a Financial Asset
Securitization Investment Trust ("FASIT").

The rent received by the Company from the tenants of its real property
("Rent") will qualify as "rents from real property" in satisfying the gross
income tests for a REIT described above only if several conditions are met.
First, the amount of Rent must not be based, in whole or in part, on the
income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. Second, the Code provides that the Rent received from a
tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the Company, or a direct or indirect owner of 10% or
more of the Company, owns 10% or more of the ownership interests in such
tenant, taking into account both direct and constructive ownership (a
"Related Party Tenant"). Third, if Rent attributable to personal property,
leased in connection with a lease of Real Property, is greater than 15% of
the total Rent received under the lease, then the portion of Rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for the Rent to qualify as "rents from real property,"
the Company generally must not operate or manage the Real Property or
furnish or render services to the tenants of such Real Property, other than
through an "independent contractor" who is adequately compensated and from
whom the Company derives no revenue. The "independent contractor"
requirement, however, does not apply to the extent the services provided by
the Company are "usually or customarily rendered" in connection with the
rental or space for occupancy only and are not otherwise considered
"rendered to the occupant." In addition, the Company may render a "de
minimis" amount of impermissible services without violating the independent
contractor requirement.

The Company has represented that it will not charge Rent for any
portion of any real property that is based, in whole or in part, on the
income or profits of any person (except by reason of being based on a fixed
percentage or percentages of receipts or sales, as described above) to the
extent that the receipt of such Rent would jeopardize the Company's status
as a REIT. In addition, the Company has represented that, to the extent
that it receives Rent from a Related Party Tenant, such Rent will not cause
the Company to fail to satisfy either the 75% or 95% gross income test.
The Company also has represented that it will not allow the Rent
attributable to personal property leased in connection with any lease of
real property to exceed 15% of the total Rent received under the lease, if
the receipt of such Rent would cause the Company to fail to satisfy either
the 75% or 95% gross income test. Furthermore, as a result of restrictions
on the ownership of Stock in the Company, no person may own, directly or
indirectly, more than 9.8% of the outstanding stock of the Company so that
no tenant of the Company should be a Related Party Tenant. Finally, the
Company has represented that it will not operate or manage its real
property or furnish or render noncustomary services to the tenants of its
real property other than through an "independent contractor," to the extent
that such operation or the provision of such services would jeopardize the
Company's status as a REIT.

REITS generally are subject to tax at the maximum corporate rate on
any income from foreclosure property (other than income that would be
qualifying income for purpose of the 75% gross income test), less expenses
directly connected with the production of such income. "Foreclosure
property" is defined as any real property (including interests in real
property) and any personal property incident to such real property (i) that
is acquired by a REIT as the result of such REIT having bid in such
property at foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law, after there was a
default (or default was imminent) on a lease of such property or on an
indebtedness owed to the REIT that such property secured, (ii) for which
the related loan was acquired by the REIT at a time when default was not
imminent or anticipated, and (iii) for which such REIT makes a proper
election to treat such property as foreclosure property. The Company does
not anticipate that it will receive any income from foreclosure property
that is not qualifying income for purposes of the 75% gross income test,
but, if the Company does receive any such income, the Company will make an
election to treat the related property as foreclosure property. If
property is not eligible for the election to be treated as foreclosure
property because the related loan was acquired by the REIT at a time when
default was imminent or anticipated, income received with respect to such
Ineligible Property may not be qualifying income for purposes of the 75% or
95% gross income test.

The Company will generally be subject to a 100% tax on net income
derived from a prohibited transaction. The term "prohibited transaction"
generally includes a sale or other disposition of property (other than
foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. In general, the assets owned by
the Company should not be considered held for sale to customers and any
such sale should not be in the ordinary course of the Company's business.
Whether property is held "primarily for sale to customers in the ordinary
course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular property. Complete assurance cannot be given that the Company
will comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business." In addition, it
should be noted that a REMIC or FASIT securitization by the Company of its
whole loans could be considered a "prohibited transaction."

It is possible that the Company will enter into hedging transactions
with respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms, including an interest rate swap
or cap agreement, option, futures contract, forward rate agreement, or
similar financial instrument (collectively, a "Qualified Hedge"). To the
extent that the Company enters into a Qualified Hedge to reduce the
interest rate risk on indebtedness incurred or to be incurred to acquire or
carry Real Estate Assets, any periodic income or gain from the disposition
of such Qualified Hedge should be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test.

The Company may receive income not described above that is not
qualifying income for purposes of the 75% and 95% gross income tests. The
Company will monitor the amount of nonqualifying income produced by its
assets and has represented that it will manage its portfolio in order to
comply at all times with the gross income tests.

If the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it nevertheless may qualify as a REIT
for such year if it is entitled to relief under certain provisions of the
Code. Those relief provisions generally will be available if the Company's
failure to meet such tests is due to reasonable cause and not due to
willful neglect, the Company attaches a schedule of the sources of its
income to its return, and the Company anticipates that any incorrect
information on the schedule will not be due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of such relief provisions. As
discussed above in "Federal Income Tax Consequences--Taxation of the
Company," even if such relief provisions apply, a 100% tax would be imposed
on the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test, multiplied by a fraction
intended to reflect the Company's profitability.

ASSET TESTS. The Company, at the close of each quarter of each
taxable year, also must satisfy, either directly or through partnerships in
which it has an interest, two tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by cash or cash items (including certain receivables),
government securities, "Real Estate Assets," or, in cases where the Company
raises new capital through Stock or long-term (at least five-year) debt
offerings, temporary investments in Stock or debt instruments during the
one-year period following the Company's receipt of such capital. The term
"Real Estate Assets" includes interests in real property, interests in
mortgages on real property to the extent the principal balance of a
mortgage does not exceed the fair market value of the associated real
property, regular or residual interests in a REMIC (except that, if less
than 95% of the assets of a REMIC consists of "real estate assets"
(determined as if the Company held such assets), the Company will be
treated as holding directly its proportionate share of the assets of such
REMIC), and shares of other REITS. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in mortgage loans or
land and improvements thereon, such as buildings or other inherently
permanent structures (including items that are structural components of
such buildings or structures), a leasehold of real property, and an option
to acquire real property (or a leasehold of real property). An "interest
in real property" also generally includes an interest in mortgage loans
secured by controlling equity interests in entities treated as partnerships
for federal income tax purposes that own real property, to the extent that
the principal balance of the mortgage does not exceed the fair market value
of the real property that is allocable to the equity interest. Second, of
the investments not included in the 75% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of
the Company's total assets, and the Company may not own more than 10% of
any one issuer's outstanding voting securities (except for its interests in
any partnership and any Qualified REIT Subsidiary).

The Company expects that any MBS, Distressed Real Property and
temporary investments that it acquires generally will be qualifying assets
for purposes of the 75% asset test, except to the extent that less than 95%
of the assets of a REMIC in which the Company owns an interest consists of
"Real Estate Assets" and the Company's proportionate share of those assets
includes assets that are nonqualifying assets for purposes of the 75% asset
test. Mortgage Loans (including Distressed Mortgage Loans, Construction
Loans, Bridge Loans and Mezzanine Loans) also will be qualifying assets for
purposes of the 75% asset test to the extent that the principal balance of
each mortgage loan does not exceed the value of the associated real
property. The Company will monitor the status of the assets that it
acquires for purposes of the various asset tests and has represented that
it will manage its portfolio in order to comply at all times with such
tests.

The Company anticipates that it may securitize all or a portion of the
Mortgage Loans which it acquires, in which event the Company will likely
retain certain of the subordinated and IO classes of MBS Interests which
may be created as a result of such securitization. The securitization of
the Mortgage Loans may be accomplished through one or more REMICs
established by the Company or, if a non-REMIC securitization is desired,
through one or more Qualified REIT Subsidiaries established by the Company.
The securitization of the Mortgage Loans through either one or more REMICs
or one or more Qualified REIT Subsidiaries should not affect the
qualification of the Company as a REIT or result in the imposition of
corporate income tax under the taxable mortgage pool rules. Income
realized by the Company from a REMIC securitization could, however, be
subject to a 100% tax as a "prohibited transaction."

If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status
if (i) it satisfied the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets
and the asset test requirements arose from changes in the market values of
its assets and was not wholly or partly caused by the acquisition of one or
more nonqualifying assets. If the condition described in clause (ii) of
the preceding sentence were not satisfied, the Company still could avoid
disqualification by eliminating any discrepancy within 30 days after the
close of the calendar quarter in which it arose.

DISTRIBUTION REQUIREMENTS. The Company, in order to avoid corporate
income taxation of its earnings, is required to distribute with respect to
each taxable year dividends (other than capital gain dividends and retained
capital gains) to its stockholders in an aggregate amount at least equal to
(i) the sum of (A) 95% of its "REIT taxable income" (computed without
regard to the dividends paid deduction and its net capital gain) and (B)
95% of the net income (after tax), if any, from foreclosure property, minus
(ii) the sum of certain items of noncash income. Such distributions must
be paid in the taxable year to which they relate, or in the following
taxable year if declared before the Company timely files its federal income
tax return for such year and if paid on or before the first regular
dividend payment date after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its "REIT taxable income," as adjusted,
it will be subject to tax thereon at regular ordinary and capital gains
corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of the
calendar year, by the end of the January immediately following such year)
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be
subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed. However, the Company
may elect to retain, rather than distribute, all or a portion of its net
long-term capital gains and pay the tax on such undistributed gains, in
which case the Company's stockholders would include their proportionate
share of such undistributed long-term capital gains in income and receive a
credit for their share of the tax paid by the Company. For purposes of the
4% excise tax described above, any such retained amounts would be treated
as having been distributed. The Company intends to make timely
distributions sufficient to satisfy the annual distribution requirements.

It is possible that, from time to time, the Company may experience
timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of that income and
deduction of such expenses in arriving at its REIT taxable income. For
example, the Company will recognize taxable income in excess of its cash
receipts when, as frequently happens, OID accrues with respect to certain
of its subordinated MBS Interests, including POs and certain IOs.
Mezzanine Loans may also be deemed to have OID for Federal income tax
purposes. OID generally will be accrued using a methodology that does not
allow credit losses to be reflected until they are actually incurred. The
Company may also be required to accrue interest income from Distressed
Mortgage Loans even though the borrowers fail to pay the full amounts due.
In addition, the Company may recognize taxable market discount income upon
the receipt of proceeds from the disposition of, or principal payments on,
MBS and Distressed Mortgage Loans that are "market discount bonds" (i.e.,
obligations with an adjusted issue price that is greater than the Company's
tax basis in such obligations), but not have any cash because such proceeds
may be used to make non-deductible principal payments on related
borrowings. Market discount income is treated as ordinary income and not
as capital gain and, thus, is subject to the 95% distribution requirement.
Furthermore, the Company would have income without the receipt of cash to
the extent of the market discount attributable to debt securities held by
a REMIC in which the Company holds a residual interest. The Company also
may recognize Excess Inclusion or other taxable income in excess of cash
flow from REMIC Residual Interests or its retained interests from non-REMIC
securitization transactions. It is also possible that, from time to time,
the Company may recognize net capital gain attributable to the sale of
depreciated property that exceeds its cash receipts from the sale. In
addition, pursuant to certain Treasury Regulations, the Company may be
required to recognize the amount of any payment to be made pursuant to a
shared appreciation provision over the term of the related loan using the
constant yield method. Finally, the Company may recognize taxable income
without receiving a corresponding cash distribution if it forecloses on or
makes a "significant modification" (as specifically defined in the Treasury
Regulations) to a loan, to the extent that the fair market value of the
underlying property or the principal amount of the modified loan, as
applicable, exceeds the Company's basis in the original loan. Therefore,
the Company may have less cash than is necessary to meet its annual 95%
distribution requirement, or because Excess Inclusion and OID are not
taken into account in calculating the Company's REIT taxable income for
purposes of the distribution requirement, to avoid corporate income tax or
the excise tax imposed on certain undistributed income. In such a
situation, the Company may find it necessary to arrange for short-term (or
possibly long-term) borrowings or to raise funds through the issuance of
Preferred Stock or additional Common Stock, or through the sale of assets.

Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirements for a year by paying
"deficiency dividends" to it stockholders in a later year, which may be
included in the Company's deduction for dividends paid for the earlier
year. Although the Company may be able to avoid being taxed on amounts
distributed as deficiency dividends, it will be required to pay to the IRS
interest based upon the amount of any deduction taken for deficiency
dividends.

RECORDKEEPING REQUIREMENTS. Under the Treasury Regulations, the
Company must maintain certain records and request on an annual basis
certain information from its stockholders designed to disclose the actual
ownership of its outstanding Stock. The Company intends to comply with
such requirements.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as a REIT in any taxable
year, and certain relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to the Company's
stockholders in any year in which the Company fails to qualify as a REIT
will not be deductible by the Company nor will they be required to be made.
In such event, to the extent of the Company's current and accumulated
earnings and profits, all distributions to stockholders will be taxable as
ordinary income and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which the Company ceased to qualify as a REIT.
It is not possible to state whether in all circumstances the Company would
be entitled to such statutory relief.

TAXATION OF TAXABLE U.S. STOCKHOLDERS

As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends or retained
capital gains) will be taken into account by such U.S. stockholders as
ordinary income and will not be eligible for the dividends received
deduction generally available to corporations. As used herein, the term
"U.S. stockholder" means a holder of Common Stock that for U.S. federal
income tax purposes is (i) a citizen or resident of the U.S., (ii) a
corporation, partnership, or other entity created or organized in or under
the laws of the U.S. or of any political subdivision thereof, (iii) an
estate whose income from sources without the United States is includible in
gross income for U.S. federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United
States, or (iv) any trust with respect to which (a) a U.S. court is able to
exercise primary supervision over the administration of such trust and (B)
one or more U.S. fiduciaries have the authority to control all substantial
decisions of the trust. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do
not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the stockholder has held his Common
Stock. However, corporate stockholders may be required to treat up to 20%
of certain capital gain dividends as ordinary income. Distributions in
excess of current and accumulated earnings and profits will not be taxable
to a stockholder to the extent that they do not exceed the adjusted basis
of the stockholder's Common Stock, but rather will reduce the adjusted
basis of such Stock. To the extent that such distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
stockholder's Common Stock, such distributions will be included in income
as long-term capital gain (or short-term capital gain if the Common Stock
had been held for one year or less), assuming the Common Stock is a capital
asset in the hands of the stockholder. In addition, any distribution
declared by the Company in October, November, or December of any year and
payable to a stockholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the
stockholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.

Stockholders may not include in their individual income tax returns
any net operating losses or capital losses of the Company. Instead, such
losses would be carried over by the Company for potential offset against
its future income (subject to certain limitations). Taxable distributions
from the Company and gain from the disposition of the Common Stock will not
be treated as passive activity income and, therefore, stockholders
generally will not be able to apply any "passive activity losses" (such as
losses from certain types of limited partnerships in which a stockholder is
a limited partner) against such income. Taxable distributions from the
Company generally will be treated as investment income for purposes of the
investment interest limitations. Capital gains from the disposition of
Common Stock (or distributions treated as such), however, will be treated
as investment income only if the stockholder so elects, in which case such
capital gains will be taxed at ordinary income rates. The Company will
notify stockholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute
ordinary income or capital gain dividends.

The Company may elect to retain and pay income tax on its net long-
term capital gains. If the Company makes this election, the Company's
stockholders would include in their income as long-term capital gain their
proportionate share of the long-term capital gain as designated by the
Company. Each stockholder will be deemed to have paid the stockholder's
share of the tax, which could be credited or refunded to the stockholder.
The basis of the stockholder's shares is increased by the amount of the
undistributed long-term capital gains (less the amount of capital gains tax
paid).

The Company's investment in MBS may cause it under certain
circumstances to recognize phantom income and to experience an offsetting
excess of economic income over its taxable income in later years. As a
result, stockholders may from time to time be required to pay federal
income tax on distributions that economically represent a return of
capital, rather than a dividend. Such distributions would be offset in
later years by distributions representing economic income that would be
treated as returns of capital for federal income tax purposes.
Accordingly, if the Company receives phantom income, its stockholders may
be required to pay federal income tax with respect to such income on an
accelerated basis, i.e., before such income is realized by the stockholders
in an economic sense. If one takes into account the time value of money,
such an acceleration of federal income tax liabilities would cause
stockholders to receive an after-tax rate of return on an investment in the
Company that would be less than the after-tax rate of return on an
investment with an identical before-tax rate of return that did not
generate phantom income. In general, as the ratio of the Company's phantom
income to its total income increases, the after-tax rate of return received
by a taxable stockholder of the Company will decrease. The Company will
consider the potential effects of phantom income on its taxable
stockholders in managing its investments.

If the Company owns REMIC Residual Interests, it is possible that
stockholders would not be permitted to offset certain portions of the
dividend income they derive from the Company with their current deductions
or net operating loss carryovers or carrybacks. The portion of a
stockholder's dividends that would be subject to this limitation would
equal his allocable share of any Excess Inclusion income derived by the
Company with respect to the REMIC Residual Interests. The Company's Excess
Inclusion income for any calendar quarter will equal the excess of its
income from REMIC Residual Interests over its "daily accruals" with respect
to such REMIC Residual Interests for the calendar quarter. Daily accruals
for a calendar quarter are computed by allocating to each day on which a
REMIC Residual Interest is owned a ratable portion of the product of (i)
the "adjusted issue price" of the REMIC Residual Interest at the beginning
of the quarter and (ii) 120% of the long-term federal interest rate
(adjusted for quarterly compounding) on the date of issuance of the REMIC
Residual Interest. The adjusted issue price of a REMIC Residual Interest
at the beginning of a calendar quarter equals the original issue price of
the REMIC Residual Interest, increased by the amount of daily accruals for
prior quarters and decreased by all prior distributions to the Company with
respect to the REMIC Residual Interest. To the extent provided in future
Treasury Regulations, the Excess Inclusion income with respect to any REMIC
Residual Interests owned by the Company that do not have significant value
will equal the entire amount of the income derived from such REMIC Residual
Interests. Furthermore, to the extent that the Company (or a Qualified REIT
Subsidiary) acquires or originates Mortgage Loans and uses those loans to
collateralize one or more multiple-class offerings of MBS for which no
REMIC election is made ("Non-REMIC Transactions"), it is possible that, to
the extent provided in future Treasury Regulations, stockholders will not
be permitted to offset certain portions of the dividend income that they
derive from the Company that are attributable to Non-REMIC Transactions
with current deductions or net operating loss carryovers or carrybacks.
Although no applicable Treasury Regulations have yet been issued, no
assurance can be provided that such regulations will not be issued in the
future or that, if issued, such regulations will not prevent the Company's
stockholders from offsetting some portion of their dividend income with
deductions or losses from other sources.

TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK

In general, any gain or loss realized upon a taxable disposition of
the Common Stock by a stockholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Stock has been held
for more than one year and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of Common Stock by a stockholder
who has held such shares for six months or less (after applying certain
holding period rules) will be treated as a long-term capital loss to the
extent of distributions from the Company required to be treated by such
stockholder as long-term capital gain. All or portion of any loss realized
upon a taxable disposition of the Common Stock may be disallowed if other
shares of Common Stock are purchased within 30 days before or after the
disposition.

CAPITAL GAINS AND LOSSES

The highest marginal individual income tax rate (which applies to
ordinary income and gain from the sale or exchange of capital assets held
for one year or less) is 39.6%. The maximum regular income tax rate on
capital gains derived by non-corporate taxpayers is 28% for sales and
exchanges of capital assets held for more than one year but not more than
eighteen months, and 20% for sales and exchanges of capital assets held for
more than eighteen months. However, any long-term capital gains from the
sale or exchange of depreciable real property that would be subject to
ordinary income taxation (i.e., "depreciation recapture") if treated as
personal property will be subject to a maximum tax rate of 25% instead of
the 20% maximum rate. For taxable years beginning after December 31, 2000,
the maximum regular capital gains rate for assets which are held more than
5 years is 18%. This rate will generally only apply to assets for which
the holding period begins after December 31, 2000. With respect to
distributions designated by the Company as capital gain dividends and any
retained capital gains that the Company is deemed to distribute, the
Company may designate (subject to certain limits) whether such a
distribution is taxable to its individual stockholders at a federal income
tax rate of 20%, 25% or 28%. Thus, the tax rate differential between
capital gains and ordinary income for non-corporate taxpayers may be
significant. In addition, the characterization of income as capital gain
or ordinary income may affect the deductibility of capital losses. Capital
losses not offset by capital gains my be deducted against a non-corporate
taxpayer's ordinary income only up to a maximum annual amount of $3,000.
Unused capital losses may be carried forward indefinitely by non-corporate
taxpayers. All net capital gain of a corporate taxpayer is subject to tax
at ordinary corporate income tax rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses
being carried back three years and forward five years.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

The Company will report to its U.S. stockholders and to the IRS the
amount of distributions paid during each calendar year, and the amount of
tax withheld, if any. Under the backup withholding rules, a stockholder
may be subject to backup withholding at the rate of 31% with respect to
distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact
or (ii) provides a taxpayer identification number, certifies as to no loss
of exemption from backup withholding, and otherwise complies with the
applicable requirements of the backup withholding rules. A stockholder who
does not provide the Company with his correct taxpayer identification
number also may be subject to penalties imposed by the IRS. Any amount
paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, the Company may be required to withhold
a portion of capital gain distribution to any stockholders who fail to
certify their non-foreign status to the Company. The IRS has issued final
Treasury Regulations regarding the back up withholding rules as applied to
non-U.S. stockholders. Those regulations alter the current system of back
up withholding compliance and will be effective for payments made after
December 31, 1998.

TAXATION OF TAX-EXEMPT STOCKHOLDERS

Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are
subject to taxation on their unrelated business taxable income ("UBTI").
While many investments in real estate generate UBTI, the IRS has ruled that
dividend distributions from a REIT to an exempt employee pension trust do
not constitute UBTI, provided that the shares of the REIT are not otherwise
used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Common Stock with debt, a
portion of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts,
and qualified group legal services plans that are exempt from taxation
under paragraphs (7), (9), (17) and (20), respectively, of Code Section
501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions from the Company as UBTI. In addition,
in certain circumstances, a pension trust that owns more than 10% of the
Company's Stock is required to treat a percentage of the dividends from the
Company as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross
income derived by the Company from an unrelated trade or business
(determined as if the Company were a pension trust) divided by the gross
income of the Company for the year in which the dividends are paid. The
UBTI rule applies to a pension trust holding more than 10% of the Company's
Stock only if (i) the UBTI Percentage is at least 5%, (ii) the Company
qualifies as a REIT be reason of the modification of the 5/50 Rule that
allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interest in the
pension trust, and (iii) either (A) one pension trust owns more than 25% of
the value of the Company's Stock or (B) a group of pension trusts, each
individually holding more than 10% of the value of the Company's Stock,
collectively owns more than 50% of the value of the Company's Stock. The
restrictions on ownership and transfer of the Company's Stock should
prevent an Exempt Organization from owning more than 10% of the value of
the Company's Stock.

Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, the Company will be
subject to tax at the highest marginal corporate rate on the portion of any
Excess Inclusion Income derived by the Company from REMIC Residual
Interests that is allocable to Stock of the Company held by Disqualified
Organizations. Any such tax would be deductible by the Company against its
income that is not Excess Inclusion income.

If the Company derives Excess Inclusion income from REMIC Residual
Interests, a tax similar to the tax on the Company described in the
preceding paragraph may be imposed on stockholders who are (i) pass-through
entities (i.e., partnerships, estates, trusts, regulated investment
companies, REITS, common trust funds, and certain types of cooperatives
(including farmers' cooperatives described in Section 521 of the Code)) in
which a Disqualified Organization is a record holder of shares or interests
and (ii) nominees who hold Common Stock on behalf of Disqualified
Organizations. Consequently, a brokerage firm that holds shares of Common
Stock in a "street name" account for a Disqualified Organization may be
subject to federal income tax on the Excess Inclusion income derived from
those shares.

The Treasury Department has been authorized to issue regulations
regarding issuances by a REIT of multiple-class mortgage-backed securities
in non-REMIC transactions. If such Treasury Regulations are issued in the
future allocating the Company's Excess Inclusion Income from non-REMIC
transactions pro rata among its stockholders, some percentage of the
dividends paid by the Company would be treated as UBTI in the hands of
stockholders that are Exempt Organizations. See "-- Taxation of Taxable U.S.
Stockholders."

TAXATION OF NON-U.S. STOCKHOLDERS

The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no
attempt will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX
LAWS WITH REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY
REPORTING REQUIREMENTS.

Distributions to Non-U.S. Stockholders that are not attributable to
gain from sales or exchanges by the Company of U.S. real property interests
and are not designated by the Company as capital gain dividends or retained
capital gains will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of
the Company. Such distributions ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the distribution unless
an applicable tax treaty reduces or eliminates that tax. However, if
income from the investment in the Common Stock is treated as effectively
connected with the Non-U.S. Stockholder's conduct of a U.S. trade or
business, the Non-U.S. Stockholder generally will be subject to federal
income tax at graduated rates, in the same manner as U.S. stockholders are
taxed with respect to such distributions (and also may be subject to the
30% branch profits tax in the case of a Non-U.S. Stockholder that is a
corporation). The Company expects to withhold U.S. income tax at the rate
of 30% on the gross amount of any such distributions made to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Company or
(ii) the Non-U.S. Stockholder files an IRS Form 4224 with the Company
claiming that the distribution is effectively connected income.

Any portion of the dividends paid to Non-U.S. Stockholders that is
treated as Excess Inclusion income will not be eligible for exemption from
the 30% withholding tax or a reduced treaty rate. In addition, if Treasury
regulations are issued in the future allocating the Company's Excess
Inclusion income from non-REMIC transactions among its stockholders, some
percentage of the Company's dividends would not be eligible for exemption
from the 30% withholding tax or a reduced treaty withholding tax rate in
the hands of Non-U.S. Stockholders. See " Taxation of Taxable U.S.
Stockholders."

Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a stockholder to the extent
that such distributions do not exceed the adjusted basis of the
stockholder's Common Stock, but rather will reduce the adjusted basis of
such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Stockholder's Common Stock, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on
any gain from the sale or disposition of his Common Stock, as described
below. Because it generally cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company. The Company
is required to withhold 10% of any distribution in excess of the Company's
current and accumulated earnings and profits. Consequently, although the
Company intends to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that the Company does not do so, any portion of
a distribution not subject to withholding at a rate of 30% will be subject
to withholding at a rate of 10%.

For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of a
U.S. real property interest (which includes certain interests in Real
Property but does not include Mortgage Loans or MBS) will be taxed to a
Non-U.S. Stockholder under the provisions of the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, distributions
attributable to gain from sales of U.S. real property interests are taxed
to a Non-U.S. Stockholder as if such gain were effectively connected with a
U.S. business. Non-U.S. Stockholders thus would be taxed at the normal
capital gain rates applicable to U.S. stockholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case
of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the hands of a Non-U.S.
corporate stockholder not entitled to treaty relief or exemption. The
Company is required to withhold 35% of any distribution that is designated
by the Company as a U.S. real property capital gains dividend. The amount
withheld is creditable against the Non-U.S. Stockholder's FIRPTA tax
liability.

Gain recognized by a Non-U.S. Stockholder upon a sale of his Common
Stock generally will not be taxed under FIRPTA if the Company is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the Stock
was held directly or indirectly by non-U.S. persons. Because the Common
Stock will be publicly traded, no assurance can be given that the Company
will be or remain a "domestically controlled REIT." In addition, a Non-US
Stockholder that owns, actually or constructively, 5% or less of the
Company's Stock throughout a specified "look-back" period will not
recognize taxable gain on the sale of his Stock under FIRPTA if the shares
are traded on an established securities market. Furthermore, gain not
subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i)
investment in the Common Stock is effectively connected with the Non-U.S.
Stockholder's U.S. trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as U.S. stockholders with
respect to such gain, or (ii) the Non-U.S. Stockholder is a nonresident
alien individual who was present in the U.S. for 183 days or more during
the taxable year and certain other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the Common Stock
were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder would
be subject to the same treatment as U.S. stockholders with respect to such
gain (subject to applicable alternative minimum tax, a special alternative
minimum tax in the case of nonresident alien individuals, and the possible
application of the 30% branch profits tax in the case of non-U.S.
corporations).

STATE AND LOCAL TAXES

The Company or the Company's stockholders may be subject to state and
local tax in various states and localities, including those states and
localities in which it or they transact business, own property, or reside.
The state and local tax treatment of the Company and its stockholders in
such jurisdictions may differ from the federal income tax treatment
described above. Consequently, prospective stockholders should consult
their own tax advisors regarding the effect of state and local tax laws
upon an investment in the Common Stock.

TAXATION OF ASC

The Company owns 100% of the non-voting common stock and 5% of the
voting common stock of ASC. The remaining voting stock of ASC is owned by
the Manager. As noted above, for the Company to qualify as a REIT, the
value of the equity and debt securities of ASC held, directly or
indirectly, by the Company may not exceed 5% of the total value of the
Company's assets. In addition, the Company may not own, directly or
indirectly, more than 10% of the voting stock of ASC. As long as the
Manager owns, directly and indirectly, less than 10% of the stock of the
Company, the Company should not be deemed to own more than 10% of the
voting stock of ASC. In addition, the Company believes that the value of
its ASC stock does not exceed 5% of the total value of its assets. If the
Service were to successfully challenge these determinations, however, the
Company likely would fail to qualify as a REIT.

ASC is organized as a corporation and will pay federal, state and
local income taxes on its taxable income at normal corporate rates. Any
such taxes will reduce amounts available for distribution by ASC, which in
turn reduce amounts available for distribution to the Company's
stockholders.

PROPOSED TAX LEGISLATION

On February 2, 1998 President Clinton release his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the
Proposal could affect the Company if enacted in final form. First, the
Proposal would prohibit a REIT from owning, directly or indirectly, more
than 10% of the voting power or value of all classes of a C corporation's
stock (other than the stock of a qualified REIT subsidiary). Currently, a
REIT may own no more than 10% of the voting stock of a C corporation (other
than a qualified REIT subsidiary), but its ownership of the nonvoting stock
of a C corporation is not limited (other than by the rule that the value of
a REIT's combined equity and debt interest in a C corporation may not
exceed 5% of the value of a REIT's total assets). That provision is
proposed to be effective with respect to stock in a C corporation acquired
by a REIT on or after the date of "first committee action" (i.e., first
action by the House Ways and Means Committee with respect to the provision)
("First Committee Action"). A REIT that owns stock in a C corporation in
excess of the new ownership limit prior to First Committee Action would be
"grandfathered," but only to the extent that the corporation does not
engage in a new trade or business or acquire substantial new assets on or
after the date of First Committee Action. If enacted as presently written,
that provision would limit the Company's use of ASC and other taxable
subsidiaries to conduct businesses the income from which would be
nonqualifying income if received directly by the Company.

Second, the Proposal would require recognition of any built-in gain
associated with the assets of a "large" C corporation (i.e., a C
corporation whose stock has a fair market value of more than $5 million)
upon its conversion to REIT status or merger into a REIT. That provision
is proposed to be effective for conversions to REIT status effective for
taxable years beginning January 1, 1999 and mergers of C corporations into
REITs that occur after December 31, 1998. This provision would require
immediate recognition of gain if, at any time after December 31, 1998, a
"large" C corporation merges into the Company.

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 400 million
shares of Common Stock, $.001 par value, and 100 million shares of
preferred stock, $.001 par value, issuable in one or more series. 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.

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 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.

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 or a majority of the Unaffiliated Directors.
The Articles of Incorporation reserve to the Company the right to amend any
provision thereof in the manner prescribed by law.

REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER

Two of the requirements for qualification as a REIT are that (1)
during the last half of each taxable year (other than the first taxable
year for which a REIT election is made) for which a REIT election is made,
not more than 50% in value of the outstanding shares may be owned directly
or indirectly by five or fewer individuals (the "5/50 Rule") and (2) there
must be at least 100 stockholders on 335 days of each taxable year (other
than the first taxable year for which a REIT election is made) of 12
months.

In order that the Company may meet these requirements at all times,
the Articles of Incorporation prohibit 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 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 to the extent such action does not affect the Company's
qualification as a REIT.

For purposes of the 5/50 Rule, the constructive ownership provisions
applicable under Section 544 of the Code (i) attribute ownership of
securities owned by a corporation, partnership, estate or trust
proportionately to its stockholders, partners or beneficiaries, (ii)
attribute ownership of securities owned by certain family members to other
members of the same family, and (iii) treat securities with respect to
which a person has an option to purchase as actually owned by that person.
These rules will be applied in determining whether a person holds shares of
Common Stock in violation of the ownership limitations set forth in the
Articles of Incorporation. 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 Articles of Incorporation.
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 Articles of Incorporation further provide 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 with respect to a
stockholder's ownership of Common Stock, to the extent such waiver does not
affect the Company's qualification as a REIT.

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 Articles of Incorporation. 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 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.

Every owner of more than 5%, (or such lower percentage as required by
the Code or the Regulations promulgated thereunder) of the outstanding
shares or any class or series of the Company's 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 of the Company 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.

DIVIDEND REINVESTMENT PLAN

The Company may implement a dividend reinvestment plan whereby
stockholders may automatically reinvest their dividends in the Company's
Common Stock. Details about any such plan would be sent to the Company's
Stockholders following adoption thereof by the Board of Directors.

MATERIAL PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS

The following is a summary of the material provisions of the Maryland
General Corporation Law, as amended from time to time, and of the Articles
of Incorporation and the Bylaws of the Company. Such summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Articles of Incorporation 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 Articles of Incorporation provide that a director may be removed
from office at any time but only, in the case of removal by shareholders,
for cause 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
or, in the case of removal by the directors, with or without cause by the
affirmation vote of at least two-thirds of the directors then in office.

STAGGERED BOARD

The Articles of Incorporation and the Bylaws divide the Board of
Directors into three classes of directors, each class constituting
approximately one-third of the total number of directors, which the classes
serving staggered three-year terms. The classification of the Board of
Directors will make it more difficult for stockholders to change the
composition of the Board of Directors because only a minority of the
directors can be elected at once. The classification provisions could also
discourage a third party from accumulating the Company's Stock or
attempting to obtain control of the Company, even though this attempt might
be beneficial to the Company and some, or a majority, of its stockholders.
Accordingly, under certain circumstances stockholders could be deprived of
opportunities to sell their shares of Common Stock at a higher price than
might otherwise be available.

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 acquirer, 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 acquirer or in respect of
which the acquirer is able to exercise or direct the exercise of voting
power (except solely by virtue of a revocable proxy), would entitle the
acquirer 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.

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 acquirer 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
acquirer 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 acquirer 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 Articles of Incorporation 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.

AMENDMENT TO THE ARTICLES OF INCORPORATION

The Company reserves the right from time to time to make any
amendment to its Articles of Incorporation, now or hereafter authorized
by law, including any amendment which alters the contract rights as
expressly set forth in the Articles of Incorporation, of any shares of
outstanding Stock. The Articles of Incorporation 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 relating to the Company's election to be taxed
as a REIT and to removal of directors may be amended only by the
affirmative vote of two thirds of the Board of Directors and the holders
of shares entitled to cast not less than two-thirds of all the votes
entitled to be cast in the election of directors.

DISSOLUTION OF THE COMPANY

The dissolution of the Company must be approved by a majority of
the directors then in office and by the affirmative vote of holders of
shares entitled to cast not less than seventy-five percent of all the
votes entitled to be cast on the matter unless such dissolution has been
approved by at least two-thirds of the directors then in office, in which
case such dissolution must also be approved by a majority of all the
votes entitled to be case 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 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 Bylaws.

POSSIBLE ANTI-TAKEOVER EFFECT OF MATERIAL PROVISIONS OF MARYLAND LAW AND OF
THE ARTICLES OF INCORPORATION 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 Articles of Incorporation
on staggered board removal of directors and the advance notice provisions
of the Bylaws 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 ______________ [address and phone]
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.

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters
named below (the "Underwriters") and each of the Underwriters, for whom
Friedman, Billings, Ramsey & Co., Inc., Lehman Brothers, Inc. and
Prudential Securities Incorporated are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company,
the number of shares of Common Stock offered hereby set forth below
opposite its name.

Underwriter Number of Shares
- ----------- ----------------

Friedman, Billings, Ramsey & Co., Inc. ..................................

Lehman Brothers Inc.

Prudential Securities Incorporated

Total............................................................

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the shares of Common Stock
offered hereby if any are purchased. The Company has agreed to indemnify
the several Underwriters against certain civil liabilities under the
Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.

The Underwriters propose initially to offer the shares of Common
Stock directly to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such offering
price less a concession not to exceed $___ per share of Common Stock. The
Underwriters may allow and such dealers may reallow a concession not to
exceed $___ per share of Common Stock to certain other dealers. After the
shares of Common Stock are released for sale to the public, the initial
public offering price and other selling terms may be changed by the
Underwriters.

The Company has granted to the Underwriters an option exercisable
during the 30-day period beginning after the date hereof to purchase, at
the initial public offering price net of any underwriting discounts and
commissions, up to an additional __________ shares of Common Stock for
the sole purpose of covering over-allotments, if any. To the extent that
the Underwriters exercise such options each Underwriter will be
committed, subject to certain conditions, to purchase that number of
additional shares of Common Stock that is proportionate to such
Underwriter's initial commitment.

PNC Bank indirectly owns 70% of the Manager's capital stock. PNC
has agreed to purchase a number of shares of the Company's Common Stock,
such that, assuming that the Underwriters exercise their over-allotment
option in full, PNC will own 3% of the shares of Common Stock
outstanding. PNC has formed a strategic alliance with Friedman, Billings,
Ramsey Group, Inc. ("FBR Group"), pursuant to which PNC and FBR Group
have agreed to work together on an arm's-length basis to refer potential
business to each other. PNC owns 4.9% of the shares of common stock of
FBR Group. Friedman, Billings, Ramsey & Co., Inc., one of the
Representatives, is an indirect, wholly-owned subsidiary of FBR Group.

FBR Asset Investment Corporation, an affiliate of Friedman,
Billings, Ramsey and Co., one of the Representatives of the Underwriters,
has agreed to acquire $10 million of Common Stock in a private placement
that will close concurrently with this Offering at the initial public
offering price, net of underwriting discounts and commissions. FBR Asset
Investment Corporation may not dispose of or otherwise transfer the
Common Stock acquired in this private placement for a period of 90 days
following the date of the Offering.

Prior to this Offering, there has been no public market for the
Common Stock. The initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the
factors to be considered in making such determination will be the history
of, and the prospects for, the industry in which the Company will
compete, an assessment of the skills of the Manager and the Company's
prospects for future earnings, the general conditions of the economy and
the securities market and the prices of offerings by similar issuers.
There can, however, be no assurance that the price at which the shares of
Common Stock will sell in the public market after this Offering will not
be lower than the price at which they are sold by the Underwriters.

The Representatives have informed the Company that the
Underwriters do not intend to confirm sales of the Common Stock to any
accounts over which they exercise discretionary authority.

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 or purchase the Common Stock. As an
exception to these rules, the Representatives may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Common
Stock. Specifically, the Representatives may overallot this Offering,
creating a syndicate short position. In addition, the Representatives may
bid for and purchase shares of Common Stock in the open market to cover
syndicate short positions or to stabilize the price of the shares.
Finally, the Representatives may impose a penalty bid on syndicate
members. This means that the Representatives may reclaim selling
concessions from syndicate members if the syndicate repurchases
previously distributed shares of Common Stock in syndicate covering
transactions, stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock
above independent market levels. The imposition of a penalty bid also
might affect the price of a security in that it may 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 the
Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will
engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.

The Company, the Manager, and their respective officers and
directors have agreed not to, directly or indirectly, offer, sell,
contract to sell, or otherwise dispose of any shares of Common Stock or
any securities convertible or exchangeable for shares of Common Stock for
a period of 180 days from the date of this Prospectus without the prior
written consent of the Friedman, Billings, Ramsey & Co., Inc. except that
the Company may, without such consent, grant options or issue shares of
Common Stock pursuant to the Company's 1998 Stock Option Plan.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by Skadden Arps Slate Meagher & Flom LLP, New
York, New York, who will rely on the opinion of Miles & Stockbridge with
respect to matters of Maryland law, and certain legal matters will be
passed upon for the Underwriters by Hunton & Williams, Richmond,
Virginia. In addition, the description of federal income tax consequences
contained in this Prospectus entitled "Federal Income Tax Consequences"
is based upon the opinion of Skadden, Arps, Slate, Meagher & Flom LLP.

EXPERTS

The balance sheet of Anthracite Capital, Inc., as of
_____________, 1997, included in this Prospectus has been audited by
_________________, 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.

GLOSSARY

There follows an abbreviated definition of certain capitalized
terms used in this Prospectus.

"Affiliate" means, when used with reference to a specified
person, (i) any person that directly or indirectly controls or is
controlled by or is under common control with the specified person, (ii)
any person that is an officer of, partner in or trustee of, or serves in
a similar capacity with respect to, the specified person or of which the
specified person is an officer, partner or trustee, or with respect to
which the specified person serves in a similar capacity, and (iii) any
person that, directly or indirectly, is the beneficial owner of 5% or
more of any class of equity securities of the specified person or of
which the specified person is directly or indirectly the owner of 5% or
more of any class of equity securities; provided, however, that the
Company an its subsidiaries will not be treated as an Affiliate of the
Manager and its Affiliates.

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

"Anticipated Repayment Date" shall mean the date specified in the
related mortgage note of when the ARD Loan is not paid in full.

"ARD Loans" shall mean a mortgage loan that provides that if it
is not paid in full as of a date specified in the related mortgage note,
then interest will accrue thereon at an increased mortgage rate and the
borrower will be required to make substantially increased payments..

"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.

"Articles of Incorporation" shall mean the Articles of
Incorporation of the Company.

"Average Invested Assets" means the average of the aggregate book
value of the assets of the Company, including the assets of all of its
direct and indirect subsidiaries before reserves for depreciation or bad
debts or other similar noncash reserves computed by taking the daily
average of such values during such period.

"Average Net Worth" means for any period the arithmetic average
of the sum of the 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.

"Balloon Loans" shall mean the 177 of the LB Mortgage Loans that
provide for Monthly Payments based on amortization schedule significantly
longer than their respective remaining terms to maturity.

"Balloon Payments" shall mean the substantial principal amounts
due and payable, together with the corresponding payment of interest that
LB Mortgage Loans have on their respective scheduled maturity dates,
unless prepaid prior thereto.

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

"BlackRock" means BlackRock Financial Management, Inc.

"Board of Directors" and "Board" shall mean the Board of
Directors of the Company.

"Bridge Loans" means loans secured by real property and used for
temporary financing.

"Business Combinations" shall have the meaning specified in the MGCL.

"Bylaws" shall mean the Bylaws of the Company.

"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.

"Certificates" shall mean the Commercial Mortgage Pass-Through
Certificates, Series 1998-C1.

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

"Class" shall mean the classes that comprise the LB Investments
which consist of Classes F, G, H, J, K, L and M.

"Closely Held" shall have the meaning specified in the MGCL.

"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 transaction prices are
not reported, 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.

"CMBS" shall mean commercial or multi-family MBS.

"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.

"CMO Residuals" means derivative mortgage securities issued by
agencies of the U.S. Government or by private originators of, or
investors in, Mortgage Loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.

"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, $.01
par value per share.

"Company" means Anthracite 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 1998 Stock Option Plan.

"Construction Loans" shall mean a loan the proceeds of which are
to be used to finance the costs of construction or rehabilitation of real
property.

"Control Shares" means voting shares of Stock which, if
aggregated with all other shares of Stock previously acquired by the
acquirer or in respect of which the acquirer is able to exercise or
direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquirer 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 if 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.

"Conforming Mortgage Loans" means conventional Mortgage Loans
that either comply with requirements inclusion in credit support programs
sponsored by FHLMC, Fannie Mae 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.

"Counsel" means Skadden Arps Slate Meagher & Flom LLP.

"Counterparty" means a third-party financial institution with
which the Company enters into an agreement.

"CPR" shall mean the Constant Prepayment Rate.

"Cut-off Date" shall mean February 1, 1998.

"Cut-off Date Balance" shall mean

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

"Defeasance Loans" shall mean the 179 of the LB Mortgage Loans
that provide the holder of the mortgage, following notice from the
borrower of its interest to prepay the mortgage loan, the right to
require the borrower, in lieu of prepayment, to pledge "Defeasance
Collateral."

"Defeasance Collateral" shall mean collateral that consists of
direct, non-callable United States Treasury obligations that provide for
payments prior, but as close as possible, to all successive due dates
(including the scheduled maturity date), with each such payment being
equal to or greater than (with any excess to be returned to the borrower)
than the Monthly Payment (including, in the use of as the scheduled
maturity date, and Balloon Payment), due on such date.

"Depositor" shall mean the Structured Asset Securities
Corporation.

"Disqualified Organization" means the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, any
other tax-exempt organization (other than a farmer's cooperative
described in Section 521 of the Code) that is exempt from taxation under
UBTI provisions of the Code, or any rural, electrical or telephone
cooperative.

"Distressed Mortgage Loans" shall mean Subperforming Mortgage
Loans and Nonperforming Mortgage Loans.

"Distressed Real Properties" shall mean REO Properties and other
underperforming or otherwise distressed real property.

"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.

"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.

"Excess Inclusion" shall have the meaning specified in Section
860E(c) of the Code.

"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 of the Company.

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

"Exempt Organization" shall mean a Tax Exempt Entity.

"FASIT" means Financial Asset Securitization Investment Trust.

"FNMA" 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.

"FNMA 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.

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

"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.

"Funds From Operations" means net income (computed in accordance
with GAAP) excluding gains or losses from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets and
after adjustments for unconsolidated partnerships and joint ventures.

"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 __ or
above by at least one of the Rating Agencies, (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 or (iii) securities that are of equivalent credit
quality as determined by the Manager.

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

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

"Ineligible Property" means property not eligible to be treated
as foreclosure property.

"Initial Investments" shall mean the Company's investment of % of
the net proceeds of the Offering in MBS Interests.

"Initial Pool Balance" shall mean the aggregate principal balance
of approximately $1,775,167,073 of the LB Mortgage Loans, after
application of all payments of principal due on or before the Cut-off
Date, whether or not received.

"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.

"IO" means Mortgage Derivative Securities representing the right
to receive interest only or a disproportionately large amount of interest
in relation to principal payments.

"Intended Transferee" means, with respect to any purported
Transfer or Non-Transfer Event, any Person who, but for any restrictions
on the transfer or ownership of Equity Stock, would own record title to
shares of Equity Stock.

"Inverse IOS" means IOS that bear interest rate at a floating
rate that varies inversely with (and often at a multiple of) changes in a
specific index.

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

"IRAs" means Individual Retirement Accounts.

"ISOS" means qualified incentive Stock options granted under the
1998 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.

"LB Investments" shall mean

"LB Mortgage Loans" shall mean the conventional monthly pay,
commercial and multifamily, fixed rate mortgage loans having the
characteristics described in the Underlying OM.

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

"MBS" shall mean Mortgage-Backed Securities (including CMBS and
RMBS).

"MBS Interests" shall mean interests in CMBS backed by mortgage
loans originated or acquired by an affiliate of Lehman Brothers that
various classes issued pursuant to the LB Commercial Mortgage Trust,
Commercial Mortgage Pass-Through Certificates, Series 1998-C1
transaction, which is expected to close in March 1998.

"MGCL" means the Maryland General Corporation Law, as amended
from time to time.

"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 BlackRock Financial Management, Inc., a Delaware
corporation.

"Market Discount Bonds" means obligations with an adjusted issue
price that is greater than the Company's tax basis in such obligations.

"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.

"Master Servicer" shall mean an entity acceptable to the Rating
Agencies that regularly engage in the business of Mortgage Loans.

"Mezzanine Loan" shall mean a loan secured by a lien on Real
Property that is subordinate to a lien on such Real Property securing
another loan.

"Monthly Payments" shall mean the scheduled payments of principal
and/or interest on the LB Mortgage Loans due on the first day of each
month.

"Mortgage Backed Securities" means debt obligations (bonds) that
are secured by Mortgage loans or Mortgage certificates.

"Mortgage Derivative Securities" means mortgage securities that
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 and may include other derivative
instruments.

"Mortgage Loans" means loans secured by real property.

"Mortgage Loan Seller" shall mean an affiliate of one of the
Underwriters.

"Mortgage Pool" shall mean the segregated pool of 261 LB Mortgage
Loans.

"Mortgage Properties" shall mean the real properties on which liens
are created pursuant to Mortgages for purposes of securing the Mortgage Loans.

"Mortgage Rates" shall mean the interest at annualized rates that
will remain fixed for their respective remaining loan terms of LB
Mortgage Loans.

"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.

"NAREIT" shall mean the National Association of Real Estate
Investment Trusts, Inc.

"Net Income" means the taxable income of the Company.

"Net Leased Real Estate" means real estate that is net leased on
a long-term basis (ten years or more) to tenants who are customarily
responsible for paying all costs of owning, operating, and maintaining
the leased property during the term of the lease, in addition to the
payment of a monthly net rent to the landlord for the use and occupancy
of the premises.

"1997 Act" means The Taxpayer Relief Act of 1997.

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

"Non-Economic Residual" shall mean CMO Residuals that are
required to report taxable income or loss but receive no cash flow from
the Mortgage Loans.

"Non-Investment Grade" means a credit rating from a Rating Agency
of "BBB" or less.

"Nonperforming Mortgage Loans" shall mean multifamily and
commercial mortgage loans for which the payment of Principal and interest
is more than 90 days delinquent.

"Non-REMIC Residual Interests" shall mean the retained interest
in a securitization transaction for which no REMIC or FASIT election is
made.

"Non-U.S. Stockholders" means nonresident alien individuals,
foreign corporations, foreign partnerships and other foreign
stockholders.

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

"Offering Memorandum" shall mean the offering memorandum of LB
Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificate,
Series 1998 C-1.

"Offering Price" shall mean the offering price of $ per Common
Share offered hereby.

"OID" shall mean original issue discount.

"One-Year U.S. Treasury Rate" means average of 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.

"Pass-Through Certificates" means securities (or interests
therein) other than Mortgage Derivative Securities and Subordinate
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.

"PNC" means PNC Bank Corp., a Delaware corporation.

"PNC Bank" means PNC Bank, National Association, a national
association chartered by the OCC.

"PNC Group" means PNC together with its subsidiaries and Affiliates.

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

"Preferred Stock" shall mean the preferred Stock of the Company.

"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 Agreement" shall mean the agreement pursuant to which
the Underwriters will underwrite the Common Stock.

"Qualified Hedges" means any interest rate swap or cap agreement,
option, futures contract, forward rate agreement, or similar financial
instrument entered into by the Company to reduce interest rate risk with
respect to any indebtedness incurred or to be incurred by the Company to
acquire or carry Real Estate Assets.

"Qualified REIT Real Estate Assets" means Pass-Through
Certificates, Mortgage Loans, Agency Certificates, real property 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.

"Qualified Temporary Investment Income" means income attributable
to stock or debt instruments acquired with new capital of the Company
(other than the proceeds of debt obligations with a term of less than
five years) received during the one-year period beginning on the day such
proceeds were received.

"Rating Agency" means, with respect to securities of U.S.
issuers, any nationally recognized statistical rating organization and,
with respect to non-U.S. issuers, any of the foregoing or any equivalent
organization operating in the jurisdiction where the issuer's principal
operations are located either Standard & Poor's and Moody's Investors
Service, Inc.

"Real Estate Asset" shall mean interests in real property,
mortgages on real property to the extent the principal balance of the
mortgage does not exceed the fair market value of the associated real
property, regular or residual interests in a REMIC, (except that, if less
than 95% of the assets of a REMIC consists of "real estate assets"
(determined as if the Company held such assets), the Company will be
treated as holding directly its proportionate share of the assets of such
REMIC), shares of other REITs and certain temporary investments..

"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.

"Related Party Tenant" means a tenant of the Company in which the
Company, or a direct or indirect owner of 10% or more of the Company,
owns more than 10% of the ownership interests, taking into account both
direct and constructive ownership.

"REMIC" means a real estate mortgage investment conduit.

"REMIC Residual Interests" shall mean a class of MBS that is
designated as the residual interest in one or more REMICS.

"Rent" shall mean the rent received by the Company from tenants
of Real Property owned by the Company.

"REO Property" shall mean real property acquired at foreclosure
(or by deed in lieu of foreclosure).

"Representatives" shall mean each Underwriter that is acting as a
representative for other Underwriters.

"Residual Interests" shall mean REMIC and non-REMIC Residual
Interests collectively.

"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.

"RMBS" shall mean a series of one- to four-family residential
MBS.

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

"Sequential Pay Certificates" shall mean the initial aggregate
Certificate Balance of Classes A-1, A-2, A-3, B, C, D, E, F, G, H, J, K,
L and M.

"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.

"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."

"Shared Appreciation Provision" means

"Special Servicing" shall mean servicing of defaulted mortgage
loans, including oversight and management of the resolution of such
mortgage loans by modification, foreclosure, deed in lieu of foreclosure
or otherwise.

"1998 Stock Option Plan" means the Stock option plan adopted by
the Company in 1998.

"Sub IOS" shall mean an IO with characteristics of a Subordinated
Interest.

"Subperforming Mortgage Loans" shall mean multifamily and
commercial mortgage loans for which default is likely or imminent.

"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.

"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.

"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, 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.

"Treasury Regulations" shall mean the income tax regulations
promulgated under the Code.

"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 Articles of Incorporation, which trust shall be for the
exclusive benefit of one or more Charitable Beneficiaries.

"Trust Fund" a trust fund established by Structured Asset
Securities Corporation that is expected to consist primarily of the
Mortgage Pool.

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

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

"UBTI Percentage" shall mean the gross income derived by the
Company from UBTI (determined as if the Company was a pension trust)
divided by gross income of the Company for the year in which the
dividends are paid.

"Unaffiliated Directors" shall mean a director who (a) does not
own greater than a de minimis interest in the Manager or any of its
Affiliates, and (b) within the last two years, has not (i) directly or
indirectly been employed by the Manager or any of its Affiliates, (ii)
been an officer or director of the Manager or any of its Affiliates,
(iii) performed services for the Manager or any of its Affiliates, or
(iv) had any material business or professional relationship with the
Manager or any of its Affiliates.

"Underlying OM" shall mean the Offering Memorandum for the MBS
Interest.

"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc.,
Lehman Brothers Inc. and Prudential Securities Incorporated as well as
others in the future and each of the underwriters for whom they are
acting as representatives.

"United States Stockholder" 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).

"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.

AUDIT REPORT OF DELOITTE & TOUCHE

ANTHRACITE CAPITAL, INC.
BALANCE SHEET
___________ ___, 1997

ASSETS

Cash ............................................ $ 0
==========

LIABILITIES AND STOCKHOLDER'S EQUITY

Stockholder's Equity
Preferred Stock, par value $0.001 per share;
100,000,000 shares authorized, no shares issued;

Common Stock, par value $0.001 per share;
400,000,000 shares authorized; [1000]
shares issued and outstanding .................. $ 1

Additional paid-in-capital.............................. 0
----------

Total Stockholder's Equity.................... $ 0
==========

See accompanying notes to balance sheet.

ANTHRACITE CAPITAL, INC.
NOTES TO BALANCE SHEET
_________ ___, 1997

NOTE 1 - THE COMPANY

[Anthracite Capital, Inc. (the "Company") was incorporated in
Maryland and was initially capitalized through the sale of shares of
Common Stock for $0 on _________ ___, 1997.] The Company will seek to
acquire primarily mortgage-backed securities and may also invest in other
real estate related assets, including 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

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.

NOTE 3 - TRANSACTIONS WITH AFFILIATES

The Company intends to enter into a Management Agreement (the
"Management Agreement") with BlackRock Financial Management, Inc. (the
"Manager"), a majority owned subsidiary of PNC Bank Corp., under which
the Manager will manage the Company's 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 equal to a percentage
of the Average Invested Assets of the Company as further defined in the
Management Agreement. The base management fee is equal to 1% per annum of
the Average Invested Assets rated less than BB- or not rated, 0.75% of
Average Invested Assets rated BB- to BB+, and 0.5% of Average Invested
Assets rated above BB+. The Company will also pay the Manager, as
incentive compensation, an amount equal to 25% of the Funds from
Operation of the Company plus gains (minus losses), before incentive
compensation, in excess of the amount that would produce an annualized
Return on Equity on the invested amount of common Stock equal to 3% over
the Ten-Year U.S. Treasury Rate as further defined in the Management
Agreement.

The Company intends to adopt a Stock Option Plan that provides
for the grant of qualified Stock Options, non-qualified Stock Options,
Stock appreciation rights and dividend equivalent rights ("Options")
under which 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.

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.

NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK BY ANYONE IN ANY
JURISDICTION WHERE, 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 AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

UNTIL _________, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

____________ SHARES

ANTHRACITE CAPITAL, INC.

COMMON STOCK

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

PROSPECTUS

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

FRIEDMAN, BILLINGS, RAMSEY & CO., INC. LEHMAN BROTHERS PRUDENTIAL
SECURITIES INCORPORATED

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

, 1998

ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts
are estimates except the SEC registration fee and the NASD filing fee.

AMOUNT TO BE PAID

SEC Registration Fee...................................... $
NYSE listing fee.......................................... *
NASD filing fee...........................................
Printing and engraving expenses........................... *
Legal fees and expenses................................... *
Accounting fees and expenses.............................. *
Transfer agent and custodian fees......................... *
Miscellaneous............................................. *

Total..................................................... *

* To be provided by amendment.

ITEM 32. SALES TO SPECIAL PARTIES

None.

ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.

None

ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

As permitted by the MGCL, the Company's Articles of Incorporation
obligate the Company to indemnify its present and former directors and
officers and the Manager and its employees, officers, directors and
controlling persons and to pay or reimburse reasonable expenses for such
persons in advance of the final disposition of a proceeding to the
maximum extent permitted from time to time by Maryland law. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service
in those or other capacities, unless it is established that (a) the act
or omission of the director or officer was material to the matter giving
rise to such proceeding and (i) was committed in bad faith, or (ii) was
the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property
or services, or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. The Bylaws of the Company implement the provisions relating to
indemnification contained in the Company's Articles of Incorporation. The
MCGL permits the charter of a Maryland corporation to include a provision
limiting the liability of its directors and officers to the corporation
and its stockholders for money damages, except to the extent that (i) the
person actually received an improper benefit or profit in money, property
or services, or (ii) a judgment or other final adjudication 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 in the proceeding. The Company's
Articles of Incorporation contain a provision providing for elimination
of the liability of its directors or officers to the Company or its
stockholders for money damages to the maximum extent permitted by
Maryland law from time to time. In addition, the officers, directors, and
controlling persons of the Company are indemnified against certain
liabilities by the Company under the Purchase Agreement relating to this
Offering. The Company will maintain for the benefit of its officers and
directors, officers' and directors' insurance.

The Underwriting Agreement (Exhibit 1.1) also provides for the
indemnification by the Underwriters of the Company, its directors and
officers and persons who control the Company within the meaning of
Section 15 of the Securities Act with respect to certain liabilities,
including liabilities arising under the Securities Act.

ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.

Not applicable.

ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements included in the Prospectus are:

Balance sheet at __________ ___, 1997

Notes to financial statements

All schedules have been omitted because they are not applicable.

(b) Exhibits

*1.1 Form of Underwriting Agreement
**3.1 Articles of Incorporation of the Registrant
*3.2 Bylaws of the Registrant
*5.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*5.2 Opinion of Miles & Stockbridge
8.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*10.1 Management Agreement between the Registrant and
BlackRock Financial Management, Inc.
*10.6 1998 Stock Option Incentive Plan
*10.8 1998 Outside Directors Stock Option Plan
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Skadden Arps Slate Meagher & Flom
LLP (included in Exhibits 5.1 and 8.1)
*23.3 Consent of Miles & Stockbridge
**24.1 Power of Attorney (included on page II-5)
*99.1 Consents to be named as a director pursuant to Rule 438

* To be filed by amendment.
** Previously filed.

ITEM 37. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing of the Offering certificates in such
denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification by Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling person of the Registrant pursuant to the provisions
referenced in Item 34 of this Registration Statement or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes:

That for purposes of determining any liability under the
Securities Act, the information omitted from the Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.

For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

The registrant undertakes to file a sticker supplement pursuant
to Rule 424(c) under the Act during the distribution period describing
each property not identified in the prospectus at such time as there
arises a reasonable probability that such property will be acquired and
to consolidate all such stickers into a post-effective amendment filed at
least once every three months, with the information contained in such
amendment provided simultaneously to the existing stockholders. The
post-effective amendment shall include audited financial statements
meeting the requirements of Rule 3-14 of Regulation S-X only for
properties acquired during the distribution period.

The registrant undertakes to send to each stockholder at least on
an annual basis a detailed statement required by the securities laws of
transactions with the Manager or its affiliates, and of fees,
commissions, compensation and other benefits paid, or accrued to the
Manager or its affiliates for the fiscal year completed, showing the
amount paid or accrued to each recipient and the services performed.

The registrant undertakes to provide to the stockholders the
financial statements required by Form 10-K for the first full year of
operations of the Company.

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

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-11 and
has duly caused this Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of
New York, State of New York, on the 2nd day of March, 1998.

ANTHRACITE CAPITAL, INC.

By: /s/ Richard Shea
__________________________
Chief Operating Officer

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

/s/ LAURENCE D. FINK Chairman of the Board
____________________________
Laurence D. Fink

/s/ HUGH R. FRATER President (Principal Executive
_____________________________ Officer
Hugh R. Frater

/s/ RICHARD SHEA Chief Operating Officer
___________________________ (Principal Financial and
Richard Shea Accounting Officer)

EXHIBIT INDEX

*1.1 Form of Underwriting Agreement
**3.1 Articles of Incorporation of the Registrant is incorporated by
reference to Exhibit 3.1 of the Registration Statement filed with
the Securities and Exchange Commission on November 21, 1997.
*3.2 Bylaws of the Registrant
*5.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*5.2 Opinion of Miles & Stockbridge
8.1 Opinion of Skadden Arps Slate Meagher & Flom LLP
*10.1 Management Agreement between the Registrant and BlackRock
Financial Management, Inc.
*10.6 1998 Stock Option Incentive Plan
*10.8 1997 Outside Directors Stock Option Plan
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Skadden Arps Slate Meagher & Flom LLP (included in
Exhibits 5.1 and 8.1)
*23.3 Consent of Miles & Stockbridge
**24.1 Power of Attorney (included on page II-5) is incorporated by
reference to Exhibit 24.1 of the Registration Statement filed
with the Securities and Exchange Commission on November 21, 1997.
*99.1 Consents to be named as a director pursuant to Rule 438

* To be filed by amendment.

FORM OF SASM&F LLP
TAX OPINION
3/2/98

__________ __, 1998

ANTHRACITE CAPITAL, INC.
345 Park Avenue, 29th Floor
New York, New York 10154

Re: Certain Federal Income Tax Consequences

Ladies and Gentlemen:

You have requested our opinion concerning certain U.S. federal
income tax consequences in connection with the underwritten public offering
(the "Offering") of Common Stock , par value $.01 per share of Anthracite
Capital, Inc., a Maryland corporation (the "Company"), pursuant to the
Registration Statement on Form S-11 (File no.[ ]) (the
"Registration Statement") filed with the Securities and Exchange Commission
on March [ ], 1998. Unless otherwise specifically defined herein, all
capitalized terms have the meanings assigned to them in the Registration
Statement.

In connection with the Offering we have acted as counsel to the
Company, and we have assisted in the preparation of the Registration
Statement and certain other documents. In formulating our opinion, we have
reviewed the Registration Statement, the Articles of Incorporation and the
Bylaws (including any amendments thereto) of the Company, and such other
documents and information provided by you as is relevant to the Offering.
In addition, you have provided us with certain representations of officers
of the Company relating to, among other things, the proposed operation of
the Company. For purposes of our opinion, we have not made an independent
investigation of the facts set forth in such representations, the
Registration Statement or any other documents. We have, consequently,
relied on your representations that the information presented in such
documents or otherwise furnished to us accurately and completely describes
all material facts relevant to our opinion. No facts have come to our
attention, however, that would cause us to question the accuracy and
completeness of such information, facts or documents in a material way. In
addition, to the extent that any of the representations provided to us by
officers of the Company relates to matters set forth in the Internal
Revenue Code of 1986, as amended (the "Code"), or the regulations
promulgated thereunder by the U.S. Treasury Department (the "Regulations"),
we have reviewed with such officers the relevant portions of the Code and
the applicable Regulations. We have also relied upon the opinion of Miles
& Stockbridge dated March [ ], 1998 with respect to certain matters of
Maryland law.

In rendering our opinion, we have assumed that the transactions
contemplated by the foregoing documents have been or will be consummated in
accordance with their terms, and that such documents accurately reflect
the material facts of such transactions. In rendering our opinion, we have
also considered and relied upon the Code, the Regulations, pertinent
judicial authorities, rulings of the U.S. Internal Revenue Service and such
other authorities as we have considered relevant. It should be noted that
such laws, Code, Regulations, judicial decisions, administrative
interpretations and other authorities are subject to change at any time
and, in some circumstances, with retroactive effect. A change in any of
the authorities upon which our opinion is based could affect our
conclusions herein.

We express no opinion as to the laws of any jurisdiction other
than the federal laws of the United States of America to the extent
specifically stated herein.

Based on the foregoing, we are of the opinion that, provided the
Company makes all elections and conforms with the procedural steps required
for qualification and taxation as a real estate investment trust ("REIT"),
beginning with its taxable year ending December 31, 1998, the Company will
be organized in conformity with the requirements for qualification as a
REIT under the Code, and the Company's proposed method of operation will
enable it to meet the requirements for qualification and taxation as a REIT
under the Code. We are also of the opinion that the descriptions of the
law and the legal conclusions contained in the Registration Statement under
the caption "Federal Income Tax Consequences" are correct in all material
respects, and the discussion thereunder fairly summarizes the federal
income tax consequences that may be material to a holder of the Common
Stock. As noted in the Registration Statement, the Company's qualification
and taxation as a REIT depends upon its ability to meet, through actual
annual operating results, certain requirements, including requirements
relating to distribution levels and diversity of stock ownership, and the
various qualification tests imposed under the Code, the results of which
will not be reviewed by us. Accordingly, no assurance can be given that
the actual results of the Company's operation for any one taxable year will
satisfy the requirements for qualification and taxation as a REIT under the
Code.

Other than as expressly stated above, we express no opinion on
any issue relating to the Company or any investment therein.

This opinion is intended for the exclusive use of the person to
whom it is addressed and it may not be used, circulated, quoted or relied
upon for any other purpose without our prior written consent; provided,
however, that we consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to Skadden, Arps, Slate,
Meagher & Flom LLP in the Registration Statement. In giving this consent,
we do not thereby admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules or regulations of the Securities and Exchange
Commission thereunder. This opinion is expressed as of the date hereof,
and we disclaim any undertaking to advise you of any subsequent changes of
the matters stated, represented, or assumed herein or any subsequent
changes in applicable law.

Very truly yours,

/s/ SKADDEN, ARPS, SLATE MEAGHER & FLOM LLP