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As filed with the Securities and Exchange Commission on November 27, 2001

Registration No. 333-73448

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

AMENDMENT NO. 1
to
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

APEX MORTGAGE CAPITAL, INC.
(Exact name of registrant as specified in its charter)

Maryland	95-4650863
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

865 South Figueroa Street,
Los Angeles, California 90017
(213) 244-0440
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

PHILIP A. BARACH
President and Chief Executive Officer
Apex Mortgage Capital, Inc.
865 South Figueroa Street
Los Angeles, California 90017
(213) 244-0440
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

Peter T. Healy, Esq.	William T. Quicksilver, Esq.
O'Melveny & Myers LLP	Manatt, Phelps & Phillips, LLP
275 Battery Street, Suite 2600	11355 West Olympic Boulevard
San Francisco, California 94111	Los Angeles, California 90064
(415) 984-8700	(310) 312-4000

Approximate date of commencement of proposed sale to the public:
As soon as practicable following the effective date of this registration statement.

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

   If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / /

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

   If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration 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 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 of the Securities Act, please check the following box. / /

We hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until we 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, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission becomes effective. This prospectus is not an offer to sell securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED NOVEMBER 27, 2001

Apex Mortgage Capital, Inc.

2,700,000 Shares

Common Stock

    We are offering 2,700,000 shares of our common stock. Our common stock is traded on the American Stock Exchange under the symbol "AXM." The last reported sale price of our common stock on the American Stock Exchange on November 26, 2001 was $10.10 per share.

Investing in our common stock involves risks.
Please read "Risk Factors" beginning on page 6.

	Per Share	Total
Public Offering Price	$	$
Underwriting Discounts and Commissions	$	$
Proceeds, Before Expenses, to Us	$	$

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

    We have granted the underwriter a 30-day option to purchase up to an additional 405,000 shares of our common stock to cover over-allotments, if any, at the public offering price per share, less underwriting discounts and commissions.

    The underwriter expects the shares of our common stock will be ready for delivery to purchasers on or about            , 2001.

Jolson Merchant Partners

The date of this prospectus is             , 2001

No dealer, salesperson or other person is authorized to distribute any information or to represent anything not contained in or incorporated by reference in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell our common stock only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

TABLE OF CONTENTS

	Page
Forward-Looking Statements	ii
Prospectus Summary	1
Risk Factors	6
Use of Proceeds	17
Market Price and Dividends on Our Common Stock	18
Capitalization	19
Selected Financial Data	20
Management's Discussion and Analysis of Financial Conditions and Results of Operations	22
Quantitative and Qualitative Disclosures About Market Risk	33
Our Company	37
Description of Securities	46
Material Changes	51
Federal Income Tax Considerations	52
Selected Provisions of Maryland Law and Our Charter and Bylaws	62
Underwriting	65
Experts	66
Legal Matters	66
Where You Can Find More Information	67
Information Incorporated by Reference	67
Financial Statements	F-1

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FORWARD-LOOKING STATEMENTS

    This prospectus contains or incorporates by reference forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "will," "believe," "expect," "anticipate," "intend," "estimate," "assume" or other similar expressions. You should not rely on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control, including the following:

•

changes in short-term interest rates;



•

changes in the markets for real estate assets and the general economy;



•

increases in the prepayment rates related to our mortgage-related assets;



•

our ability to use borrowings to finance the acquisition of our mortgage-related assets;



•

our ability to maintain our qualification as a real estate investment trust for federal income tax purposes; and



•

changes in government regulations affecting our business.

    Other risks, uncertainties and factors, including those discussed under "Risk Factors" in this prospectus or described in reports that we file from time to time with the Securities and Exchange Commission, could cause our actual results to differ materially from those projected in any forward-looking statements we make. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ii

PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this prospectus. The summary is not complete and does not contain all of the information you should consider before investing in our common stock. We urge you to read this entire prospectus carefully, including the financial statements, along with the information that is incorporated by reference into this prospectus. You should consider the information discussed under "Risk Factors" carefully before you decide to purchase our common stock. All references to "we," "us" or the "Company" shall mean Apex Mortgage Capital, Inc.

Our Business

    We are a financial services company that primarily acquires United States agency and other highly-rated single-family real estate fixed-rate and adjustable-rate mortgage-related assets. We use our equity capital and borrowed funds to generate income based on the difference between the yield on our mortgage-related assets and the cost of our borrowings. We have elected to be taxed as a real estate investment trust, or REIT, under the United States internal revenue code. As long as we retain our REIT status, we generally will not be subject to federal taxes on our income to the extent that we distribute our net income to our stockholders. We operate in accordance with our investment, leverage, interest rate risk management and REIT compliance policies, which our board of directors reviews and approves at least annually. We are managed pursuant to a management agreement with TCW Investment Management Company.

    As of September 30, 2001, we had $539,466,000 in assets, $487,016,000 in liabilities and $52,450,000 in equity. As of that date, approximately 96% of our assets consisted either of mortgage-backed securities guaranteed by an agency of the United States government, such as the Government National Mortgage Association, Fannie Mae and the Federal Home Loan Mortgage Corp., or other mortgage-related securities rated AAA by one or more nationally recognized rating agencies.

The Manager and Our Executive Officers

    TCW Investment Management Company manages our day-to-day operations pursuant to a management agreement and the direction and oversight of our board of directors. A majority of our board of directors is unaffiliated with the management company or The TCW Group, Inc., the parent company of the management company. The management company's key officers and our investment management team is comprised of selected members of The TCW Group, Inc.'s mortgage-backed securities group, all of whom have experience in raising capital for, investing in and managing fixed-income instruments. An external management structure allows us to take advantage of the existing operational systems, expertise and economies of scale associated with the management company's current business operations.

    The management company was established in 1987 as an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The TCW Group, Inc. was established in 1971 and manages both domestic and international investments for a range of clients with diverse investment objectives. As of September 30, 2001, the TCW group of companies had under management or committed to management approximately $74.7 billion, of which $35.6 billion consisted of United States fixed-income instruments. Of that $35.6 billion of fixed-income instruments, $23.2 billion consisted of mortgage-related assets which are managed by the mortgage-backed securities group of the TCW group of companies. The majority of our executive officers are senior members of the mortgage-backed securities group.

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Our primary executive officers are as follows:

•

Philip A. Barach, President and Chief Executive Officer. Mr. Barach is also a Group Managing Director and Chief Investment Officer of Investment Grade Fixed Income of The TCW Group, Inc. and the management company, as well as a member of The TCW Group Inc.'s mortgage-backed securities group. Before joining The TCW Group, Inc. in 1987, Mr. Barach was employed by Sun Life Insurance Company, where he was Senior Vice President and Chief of Investments. Previously, Mr. Barach served as Head of Fixed Income Investments for the State of California Retirement System.



•

Jeffrey E. Gundlach, Vice Chairman of the Board and Chief Investment Officer. Mr. Gundlach is also a Group Managing Director of The TCW Group, Inc. and the management company. Prior to joining The TCW Group, Inc. in 1985, Mr. Gundlach was employed by Transamerica Corporation's Property/Casualty Insurance division as a Senior Loss Reserve Analyst responsible for investment discount and funding strategies.



•

David S. DeVito, Interim Chief Financial Officer and Controller. Mr. DeVito was appointed our Interim Chief Financial Officer in August 2001 and has been our Controller since March 1999. Mr. DeVito is also a Managing Director and Chief Financial Officer of The TCW Group, Inc. and the management company and certain of its affiliates. Prior to joining The TCW Group, Inc. in 1993, Mr. DeVito was a Senior Manager with Deloitte & Touche LLP, specializing in serving the investment management and securities broker/dealer industries.

Our Strategy

    We will continue to implement the following strategies, through which we expect to earn a net interest margin that will enable us to generate dividend yields for stockholders:

•

acquiring various types of mortgage-related assets;



•

leveraging our portfolio of mortgage-related assets to achieve higher returns on equity;



•

financing our purchases of mortgage-related assets in the capital markets; and



•

mitigating interest rate volatility by utilizing hedging strategies.

    We intend to acquire mortgage-related assets that we believe will maximize returns on capital invested. Before making these investments, we consider the amount and nature of the anticipated returns from the mortgage-related assets, our ability to pledge the mortgage-related assets to secure collateralized borrowings, and the costs associated with financing, hedging, managing, securitizing and reserving for these mortgage-related assets.

    We primarily invest in mortgage-related assets, which include short-term investments, mortgage-backed securities, high-credit quality mortgage loans, mortgage derivative securities and other investments.

    We have established the following four primary operating policies to implement our business strategy:

•

the Investment Policy;



•

the Leverage Policy;



•

the Interest Rate Risk Management Policy; and



•

the REIT Compliance Policy.

    At September 30, 2001, we held $515,942,000 of mortgage-backed securities in our portfolio, 76% of which were fixed-rate pass-through certificates, 21% of which were collateralized mortgage

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obligations and 3% of which were adjustable-rate pass-through certificates. In addition, at September 30, 2001, our portfolio of fixed-income trading securities had a weighted-average coupon of 6.58% and a weighted-average life of 2.6 years.

    At September 30, 2001, we had outstanding $479,790,000 of reverse repurchase agreements with a weighted-average current borrowing rate of 2.99% and a maturity of 1.0 month.

    We may also continue to acquire other investments that may include equity and debt securities issued by other primarily mortgage-related finance companies, interests in mortgage-related collateralized bond obligations, other subordinated interests in pools of mortgage-related assets, commercial mortgage loans and securities and residential mortgage loans other than high-credit quality mortgage loans. Although we expect that our other investments will be limited to less than 10% of our total assets, we have no limit on how much of our stockholders' equity will be allocated to other investments. There may be periods in which other investments represent a large portion of our stockholders' equity. In addition, we intend to allocate a portion of our equity capital to the purchase of lower credit quality assets.

    In order to manage and mitigate the interest rate risk associated with the purchase and leverage of mortgage-related assets, we will continue to use various hedging techniques and instruments. These include interest rate swaps, forward contracts on various United States treasury notes, interest rate caps and similar financial instruments.

    In order to reduce the impact of prepayment risk in our portfolio of mortgage-related assets, we generally maintain a diversified portfolio with a variety of prepayment characteristics and exercise caution when purchasing mortgage-related assets with any significant market price premium.

    Our leverage policy attempts to strike a balance between the under-utilization of leverage, which reduces potential returns to stockholders, and the over-utilization of leverage, which could reduce our ability to meet our obligations during periods of adverse market conditions. We have established a leverage policy to seek to control the type and amount of leverage used to fund the acquisition of our mortgage-related assets, and to provide guidelines for using secured borrowings in the form of uncommitted secured borrowings and committed secured borrowings.

    We generally expect to maintain a debt-to-equity ratio of between 8.0 and 12.0, although the ratio may vary from time to time depending upon market conditions and other factors that our management deems relevant. For purposes of calculating this ratio, we assume our equity is equal to the value of our investment portfolio on a marked-to-market basis, less the book value of our obligations under repurchase agreements and other collateralized borrowings. At September 30, 2001, our debt-to-equity ratio was approximately 9.2.

General Information

    We were incorporated in Maryland on September 15, 1997 and commenced operations on December 9, 1997. Our principal executive offices are located at 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017, and our telephone number is (213) 244-0440. Our Internet address is www.apexreit.com. The information contained on our website and on any websites linked by our website, however, is not a part of this prospectus and you should not rely on such information in deciding whether to invest in our company.

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Recent Developments

Quarterly Dividends

    On November 26, 2001, we announced that our board of directors declared a fourth quarter 2001 dividend distribution of $0.45 per share of our common stock, which will be payable on January 18, 2002 to stockholders of record on December 28, 2001. The fourth quarter dividend represents an increase of $0.05 per share over the third quarter dividend. Dividends on our common stock will be paid only if and when declared by our board of directors, which may not declare dividends in the future at any particular rate.

Equity Offering, Investment of Proceeds and Hedging Arrangements

    In October 2001, we issued 6,095,000 shares of our common stock in a registered public offering, raising net proceeds of approximately $57 million after underwriting discounts, commissions and other estimated expenses. We invested the net proceeds primarily in agency guaranteed fixed-rate mortgage-backed securities, consistent with our investment policy. Our portfolio of mortgage-backed securities was approximately $1.2 billion at October 31, 2001, compared to $516 million at September 30, 2001. Consistent with our leverage policy, our debt-to-equity ratio at October 31, 2001 was approximately 10.5, compared to approximately 9.2 at September 30, 2001.

    Since September 30, 2001, we have entered into interest rate swap agreements with a notional amount of $550 million and maturities ranging from 2.5 years to 10.0 years, matching the effective duration of our mortgage-related assets. Under these swap agreements, we pay each month a fixed weighted-average annual interest rate of 3.78% and receive a variable interest rate equivalent to the one-month London Inter-Bank Offered Rate.

The Relationship Between The TCW Group, Inc. and Société Générale, S.A.

    On April 11, 2001, The TCW Group, Inc. and certain of its stockholders, and Société Générale, S.A., Société Générale Asset Management, S.A., or SGAM, a wholly-owned subsidiary of Société Générale, and certain other parties entered into an acquisition agreement and plan of reorganization pursuant to which SGAM agreed to acquire a controlling interest in The TCW Group, Inc. The first step in the acquisition closed on July 6, 2001 and as a result of this transaction, Société Générale controls The TCW Group, Inc. and TCW Investment Management Company.

The Offering

Common stock offered	2,700,000 shares(1)
Common stock outstanding after this offering	14,548,000 shares(2)(3)
American Stock Exchange trading symbol	AXM

(1)

Excludes a 30-day option granted to the underwriter to purchase up to 405,000 additional shares of common stock.

(2)

Includes 6,095,000 shares of our common stock that we issued in our October 2001 public offering.

(3)

Does not give effect to the issuance of: (a) 878,000 shares of common stock issuable upon the exercise of currently outstanding stock options as of September 30, 2001, and (b) shares which may be issued upon the exercise of the over-allotment option granted to the underwriter.

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Summary Financial Data

    The summary financial data as of December 31, 2000 and 1999 and the three years in the period ended December 31, 2000 are derived from our audited financial statements incorporated by reference and included in this prospectus. The summary financial data as of December 31, 1998 and 1997 and for the year ended December 31, 1998 and the period from December 9, 1997 to December 31, 1997 are derived from audited financial statements not included in this prospectus. The summary financial data for the nine-month periods ended September 30, 2000 and 2001 are derived from our unaudited financial statements for those periods included in this prospectus. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Interim results are not necessarily indicative of the results for a full year. You should read this summary financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited and unaudited financial statements and notes thereto that are included in this prospectus beginning on page F-1.

	Period from December 9 to December 31,		Year Ended December 31,							Nine Months Ended September 30,
	1997		1998		1999		2000			2000			2001
	(in thousands, except for per share data)
Statement of Operations Data:
Interest income	$	428	$	41,975	$	52,517	$	42,834		$	32,610		$	30,612
Interest expense		111		36,007		42,345		33,779			25,878			16,260
Net interest income		317		5,968		10,172		9,055			6,732			14,352
Net operating income(1)		150		4,500		9,174		8,460			6,197			14,072
Net gain (loss) on investment transactions(2)		—		1,047		1,938		(36,703	)		(37,444	)		(4,431	)
Net income (loss)	$	150	$	5,547	$	11,112	$	(28,243	)	$	(31,247	)	$	9,210
Weighted average number of diluted shares outstanding		6,700,100		6,190,000		5,779,000		5,753,000			5,753,000			5,846,000
Diluted net income (loss) per share	$	0.02	$	0.90	$	1.92	$	(4.91	)	$	(5.43	)	$	1.58
Dividends declared per share	$	0.04	$	1.07	$	1.72	$	1.51		$	1.16		$	1.15

	At December 31,								At September 30,
	1997		1998		1999		2000		2000		2001
	(in thousands, except for per share data)
Balance Sheet Data:
Total assets	$	271,307	$	865,478	$	735,745	$	614,073	$	565,401	$	539,466
Total liabilities		178,310		777,448		679,704		569,690		516,970		487,016
Stockholders' equity	$	92,997	$	88,030	$	56,041	$	44,383	$	48,431	$	52,450
Book value per share	$	13.88	$	15.30	$	9.74	$	7.71	$	8.42	$	9.12

(1)

Net operating income represents interest income earned on fixed-income securities less cost of borrowings on reverse repurchase agreements plus dividend income from equity securities less general and administrative expenses. The cost of hedging the portfolio of fixed-income securities with short positions on United States treasury notes is not included in net operating income, but is instead included in net gain (loss) on investment transactions. If the cost of hedging the portfolio of fixed-income securities with short positions on United States treasury notes were included in the net operating income calculations, the Company's net operating income would be reduced.

(2)

Includes (i) a loss of $6,558 relating to sales of mortgage-backed securities in the second quarter of 2000 and (ii) a non-recurring impairment charge of $30,077 in the third quarter of 2000, primarily on fixed-rate mortgage securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Losses Incurred During 2000."

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RISK FACTORS

An investment in our common stock involves various risks. You should carefully consider the following risk factors in conjunction with the other information contained and incorporated by reference in this prospectus before purchasing our common stock. If any of the risks discussed in this prospectus actually occur, our business, operating results, prospects or financial condition could be harmed. This could cause the market price of our common stock to decline and could cause you to lose all or part of your investment.

Risks Related to our Business

We may incur losses on our fixed-rate investments during periods of rising interest rates.

    We generally fund our acquisition of fixed-rate mortgage-related assets with short-term borrowings. During periods of rising interest rates, our costs associated with borrowings used to fund acquisition of fixed-rate assets are subject to increases while the income we earn from these assets remains substantially fixed. This reduces the net interest spread between the fixed-rate mortgage-related assets that we purchase and our borrowings used to purchase them, which could cause us to suffer a loss. For example, our losses incurred in 2000 arose in part as a result of the reduced net interest spread between our fixed-rate mortgage-related assets and our borrowings used to purchase them.

Interest rate caps on our adjustable-rate mortgage-related assets may reduce our income during periods of rising interest rates.

    Periodic and lifetime interest rate caps typically apply to adjustable-rate mortgage-related assets, which limit the amount that an applicable asset's interest rate can increase or decrease during any particular period. Our borrowings will not be subject to similar limitations on any increases in the applicable interest rate. If interest rates increase, the rates we pay on our borrowings could increase without limitation, while the interest rates we receive on our mortgage-related assets could be limited. This problem is magnified for our adjustable-rate mortgage-related assets that are not fully indexed. Further, some adjustable-rate mortgage-related assets may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we could receive less cash income on adjustable-rate mortgage-related assets than we need to payinterest on our related borrowings. These factors could lower our net interest income or cause us to suffer a net loss during periods of rising interest rates.

Interest rate mismatches between our adjustable-rate mortgage-related assets and our borrowings used to fund our purchases of the assets may reduce our income during periods of changing interest rates.

    We fund most of our acquisitions of adjustable-rate mortgage-related assets with borrowings that have interest rates based on indices and repricing terms similar to, but of shorter maturities than, the interest rate indices and repricing terms of the mortgage-related assets. Therefore, in most cases the interest rate indices and repricing terms of the mortgage-related assets that we acquire and their funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods when the spread between these indices was volatile. During periods of changing interest rates, these mismatches could reduce our net income, dividend yield or the market price of our common stock.

Failure to design or implement an effective hedging strategy to manage interest rate risk may decrease our income from our mortgage-related assets and may cause us to incur losses.

    We develop and use an objective interest rate risk management strategy, also called a hedging strategy, in an effort to minimize the impact of interest rate changes. However, developing an objective and effective hedging strategy is difficult, and no strategy can completely insulate us from risks

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associated with interest rate changes. Hedging techniques involving the use of mortgage derivative securities are highly complex and may produce volatile returns. In addition, hedging strategies typically involve transaction costs that increase dramatically during periods of rising and fluctuating interest rates. These hedging techniques may not have a beneficial impact on our net income. Our net losses incurred in 2000 were in part a result of ineffective hedging strategies.

    In addition, the REIT provisions of the tax code may substantially limit our ability to engage in hedging transactions. In particular, our hedging activities are limited by the tax code's asset rules and sources-of-income rules applicable to REITs. These constraints in the tax code may prevent us from effectively implementing the optimal hedging strategies that would further insulate our net income from changes in the interest rates.

If we incorrectly predict the level of prepayments that our mortgage-related assets will experience, we may select an inappropriate and, thus, ineffective hedging strategy.

    We select hedging techniques based partly on predicted levels of prepayments by mortgage borrowers of our mortgage-related assets. Many mortgage borrowers have the option of prepaying their mortgages under specified conditions. Prepayment rates tend to decrease during periods of rising interest rates and to increase during periods of declining interest rates. Fixed-rate assets generally are acquired with a projected weighted average life based on assumptions regarding prepayments. In general, when we acquire a fixed-rate mortgage-related asset or a capped adjustable-rate mortgage-related asset with borrowed money, we enter into an interest rate swap agreement or other hedging instrument in order to fix our borrowing costs for a period close to the expected average life of the fixed-rate or capped rate asset. This strategy is designed to protect us from rising interest rates by fixing our borrowing costs for the expected lifetime of the asset. Whether our selected hedging strategy is effective will depend significantly upon whether we correctly predict the level of prepayments by the borrowers of our mortgages.

    If prepayments of our mortgage-related assets are slower than we predict, then the life of our mortgage-related assets will be longer and the effectiveness of our hedging techniques will be reduced. However, if prepayment rates decline, as often occurs in a rising interest rate environment, the life of the mortgage-related asset could extend beyond the term of the swap agreement or other hedging instrument. This situation would negatively impact our profits since the income we earn on the fixed-rate asset will remain fixed, but after the expiration of the hedging instrument our borrowing costs will become variable. This is also known as extension risk. We may have to refinance our borrowing at the new, higher prevailing interest rate, thus reducing or eliminating our net interest income from the mortgage-related asset. This situation may also cause the market value of our mortgage-related assets to decline, with little or no offsetting gain from the related hedging transactions. In some situations, we may be forced to sell assets and incur losses to maintain adequate liquidity. Our hedging activity is also limited by the requirements of the tax code applicable to us as a REIT.

    Conversely, if prepayments of our mortgage-related assets are faster than we predict, as may occur in a falling interest rate environment, the average life of our mortgage-related assets becomes shorter than the life of the related hedging instrument. If this were to happen, we may be forced to reinvest our funds in mortgage-related assets with interest rates lower than that of the related hedging instrument, which would result in the narrowing of interest rate spreads or may cause losses.

Increased levels of prepayments from mortgage-related assets may also decrease net interest income.

    We anticipate that a substantial portion of adjustable-rate mortgage-related assets may bear initial interest rates that are lower than their "fully indexed" rates, which are equivalent to the applicable index rate plus a margin. If an adjustable-rate mortgage-related asset is prepaid prior to or soon after

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the time of adjustment to a fully indexed rate, we will have held the mortgage-related asset while it was less profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life. In addition, the prepayment of a mortgage-related asset that we purchased at a premium would result in our immediately writing-off any remaining capitalized premium amount and, consequently, suffering a corresponding reduction in net interest income. We may also acquire mortgage derivative securities that represent the right to receive interest only or a disproportionately large amount of interest, which would similarly experience a lower rate of return in the event of faster than expected prepayments. Finally, if we are unable to acquire new mortgage-related assets to replace the prepaid mortgage-related assets, our financial condition, cash flow and results of operations could suffer.

We face potential net interest losses and operating losses in connection with our substantial use of leverage when purchasing mortgage-related assets.

    We borrow substantial sums against our existing mortgage-related assets to acquire additional mortgage-related assets and thereby to increase the overall size of our mortgage-related asset portfolio. We generally expect that up to 92% of our total mortgage-related assets will be financed with borrowed funds.

    Our leveraging strategy increases the risks of our operations in several ways.

•

The use of leverage increases our risk of loss resulting from various factors, including rising interest rates, downturns in the economy or deteriorations in the conditions of any of our mortgage-related assets.



•

A majority of our borrowings are secured by our mortgage-related assets, primarily under reverse repurchase agreements. These loans are "marked-to-market" based on the market value of the mortgage-related assets pledged to secure the specific borrowings at a given time. Some mortgage-related assets may be cross-collateralized to secure multiple borrowing obligations to a particular lender. A decline in the market value of the mortgage-related assets used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell mortgage-related assets under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the mortgage-related assets, we would experience losses.



•

A default of a mortgage-related asset that constitutes collateral for a loan could also result in an involuntary liquidation of the mortgage-related asset, including any cross-collateralized mortgage-related assets. This would result in a loss to us of the difference between the value of the mortgage-related asset upon liquidation and the amount borrowed against the mortgage-related asset.



•

To the extent we are compelled to liquidate qualified REIT assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of income could be negatively affected, which would jeopardize our status as a REIT. Losing our REIT status would cause us to lose tax advantages applicable to REITs and may decrease our overall profitability and distributions to our stockholders.

    In these ways, the use of leverage increases our risk of loss and may reduce our net income by increasing the risks associated with other risk factors, including a decline in the market value of our mortgage-related assets or a default of a mortgage-related asset.

8

We may invest in "inverse floaters," which generally experience greater volatility in their market prices, thus exposing us to greater risk with respect to their rate of return.

    We may acquire a type of securities called "inverse floaters," which may behave similarly to securities that are leveraged since their interest rates usually vary by a magnitude much greater than the magnitude of the index rate of interest. The leverage-like characteristics of inverse floaters result in greater volatility in their market prices. Thus, our acquisition of inverse floaters exposes us to the risk of greater volatility in our portfolio, which could adversely affect our net income and overall profitability.

We depend on borrowings to purchase mortgage-related assets. If we fail to obtain or renew sufficient funding on favorable terms, we will be limited in our ability to acquire mortgage-related assets and our earnings and profitability could decline.

    We depend on short-term borrowings to fund acquisitions of mortgage-related assets. Accordingly, our ability to achieve our investment objectives depends on our ability to borrow money in sufficient amounts and on favorable terms. In addition, we must be able to renew or replace our maturing short-term borrowings on a continuous basis. Moreover, we are dependent upon a few lenders to provide the primary credit facilities for our purchases of mortgage-related assets.

    If we are not able to renew or replace maturing borrowings, we may be required to sell our mortgage-related assets under adverse market conditions and may incur permanent capital losses as a result. In addition, the failure to renew or replace mature borrowings may require us to terminate hedge positions, which could result in further losses. Any number of these factors in combination may cause difficulties for us, including a possible liquidation of a major portion of our portfolio at disadvantageous prices with consequent losses, which may render us insolvent.

Possible market developments could cause our lenders to require us to pledge additional assets as collateral. If our assets are insufficient to meet the collateral requirements, then we may be compelled to liquidate particular assets at an inopportune time.

    Possible market developments, including a sharp rise in interest rates, a change in prepayment rates or increasing market concern about the value or liquidity of one or more types of mortgage-related assets in which our portfolio is concentrated, may reduce the market value of our portfolio, which may cause our lenders to require additional collateral. This requirement for additional collateral may compel us to liquidate our assets at a disadvantageous time, thus adversely affecting our operating results and net profitability. For example, our losses incurred in 2000 resulted in part from our decision to liquidate assets in response to a decline in the market value of our investment portfolio.

Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or a lender files for bankruptcy.

    Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid the automatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without delay in the event that we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that a lender files for bankruptcy. Thus, the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either a lender or us.

9

Because we invest in assets that experience periods of illiquidity, we may lose profits or be prevented from earning capital gains if we cannot sell mortgage-related assets at an opportune time.

    We bear the risk of being unable to dispose of our mortgage-related assets at advantageous times or in a timely manner because mortgage-related assets experience periods of illiquidity. The lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale. As a result, the illiquidity of mortgage-related assets may cause us to lose profits or the ability to earn capital gains.

Because the majority of our portfolio is classified as trading securities, changes in the market value of our portfolio could result in increased net income volatility, including the reporting of net losses.

    On January 1, 2001, we adopted Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, and reclassified our existing mortgage-related assets portfolio from the available-for-sale category of SFAS No. 115 to the trading category. The primary impact of this accounting change is that both unrealized and realized gains and losses on our mortgage-related assets portfolio and the related hedging instruments will be included in net income each reporting period. This will likely significantly increase the volatility of our quarterly earnings in future periods. In periods in which the fair market value of our mortgage-related assets portfolio net of hedging transactions were to decline in value, we could report net losses that could be material.

Because we depend on the management company and its personnel for successful operations, the loss of any of its key personnel could severely and detrimentally affect our operations.

    We depend on the diligence, experience and skill of the officers and employees of the management company for the selection, structuring and monitoring of our mortgage-related assets and associated borrowings. We depend on our officers and directors to monitor the management company. Currently, our senior officers are Messrs. Barach, Gundlach and DeVito. We have not entered into employment agreements with our senior officers, nor do we require the management company to employ specific personnel or to dedicate employees solely to our business. These individuals are free to engage in competitive activities in our industry. The loss of any key person could harm our entire business, financial condition, cash flow and results of operations.

Our board of directors may change our operating policies and strategies without prior notice or stockholder approval.

    Summaries of our current operating policies and strategies are contained in the annual and quarterly reports we file with the Securities and Exchange Commission, which are incorporated by reference in this prospectus. However, our board of directors can modify or waive these policies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies may have on our business and operating results or our stock price; however, the effects may be adverse.

Risks Related to Conflicts of Interest

Since the management company may receive a significant fee if we terminate the management agreement, we may not be able to economically terminate the management agreement in the event that the management company fails to meet our expectations.

    If we terminate the management agreement, or if we decide not to renew it, then we may have to pay a significant fee to the management company. The actual amount of the fee is not known because the fair market value of the management agreement cannot be determined in advance with certainty. Paying this fee would reduce the cash available for distribution to stockholders and may cause us to

10

suffer a net operating loss. Consequently, we may not be able to terminate the management agreement economically even if we are dissatisfied with the management company's performance.

The management company and its affiliates may allocate mortgage-related opportunities to other entities, and thus may divert attractive investment opportunities away from us.

    The management company and its affiliates purchase and manage mortgage securities for third-party accounts. The management company has no obligation to make investment opportunities available to us. As a result, the management company may face a conflict of interest between allocating assets and other mortgage-related opportunities to us or to other accounts managed by it or its affiliates. In addition, the management company and its affiliates may from time to time purchase mortgage securities for their own accounts. These conflicts may result in decisions or allocations of mortgage securities by the management company that are not in our best interest.

The compensation structure for the management company creates an incentive for the management company to increase the riskiness of our mortgage portfolio in order to maximize its compensation.

    In addition to its base management compensation, the management company earns incentive compensation for each fiscal year equal to 30% of our net income in excess of the amount that would produce an annualized return on equity equal to the ten-year United States treasury rate plus 1%. As a result, the management company shares in our profits but not in our losses. Consequently, as the management company evaluates for us different mortgage-related assets for investment and different investment strategies, there is a risk that the management company will cause us to assume more risk than is prudent in an attempt to increase its incentive compensation. Other key criteria related to determining appropriate investments and investment strategies, including the preservation of capital, may be unduly ignored at the expense of the management company's emphasis on maximization of income.

Because the management company may render services to other mortgage investors, this could reduce the amount of time and effort that the management company devotes to us and, consequently, our profitability and overall management could suffer.

    The management agreement does not restrict the right of the management company or any of its officers, directors, employees or affiliates from doing business, including the rendering of advice in the purchase of mortgage-related assets that meet our investment criteria, with any other person or entity. The management company may also advise other mortgage-related entities, including REITs, that invest in residential or commercial mortgages or other residential and non-residential mortgage securities. However, members of the mortgage-backed securities group of The TCW Group, Inc. or any successor group will not provide any active management services to a residential mortgage REIT, other than ourselves, that invests primarily in high-quality mortgage securities comparable to our investments. In addition to the management company's ability to do business with any other third party, the management agreement does not specify a minimum time period that the manager and its personnel must devote to us. The ability of the management company to engage in these business activities could reduce their time and effort dedicated to managing us.

Risks Related to REIT Compliance and Other Matters

If we are disqualified as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability.

    We currently operate, and we intend to continue to operate, so as to qualify as a REIT under the tax code. However, we may not remain qualified as a REIT in the future. Qualification as a REIT involves the application of highly technical and complex tax code provisions for which only a limited

11

number of judicial or administrative interpretations exist. If we fail to qualify as a REIT in any tax year, then:

•

we would be taxed as a regular domestic corporation, which, among other things, means being disallowed from deducting distributions to stockholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates;



•

any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders; and



•

unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our qualification, and thus, our cash available for distribution to stockholders would be reduced for each of the years during which we were not permitted to qualify as a REIT.

    Even if we remain qualified for taxation as a REIT, we may be subject to federal taxes based on some of our activities, which could result in decreased cash available for distribution to our stockholders.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

    In order to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature and diversification of our mortgage-related assets, the amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may limit our ability to hedge effectively.

    The REIT provisions of the tax code may substantially limit our ability to hedge mortgage-related assets and related borrowings by requiring us to limit our income in each year from "qualified hedges," together with any other income not generated from qualified REIT real estate assets, to less than 25% of our gross income. In addition, we must limit our aggregate income from hedging and services from all sources, other than from qualified REIT real estate assets or qualified hedges, to less than 5% of our annual gross income. As a result, we may have to limit our use of advantageous hedging techniques, which may result in greater risks associated with changes in the interest rates. If we were to violate the 25% or 5% limitations, we may have to pay a penalty tax equal to the amount of income in excess of those limitations. In the case of a willful violation, we could lose our REIT status for federal income tax purposes.

Complying with REIT requirements may force us to liquidate otherwise attractive investments.

    In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities cannot include more than 10% of the outstanding voting securities of any one issuer or 10% of the total value of the outstanding securities of any one issuer. In addition, no more than 5% by value of our assets can consist of the securities of any one issuer. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences.

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Complying with REIT requirements may force us to borrow to make distributions to stockholders.

    From time to time, we may generate taxable income greater than our net income for financial reporting purposes from, among other things, amortization of capitalized purchase premiums, or our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the tax code. Thus, we could be required to borrow funds, sell a portion of our mortgage-related assets at disadvantageous prices or find another alternative. These options could increase our costs or reduce our equity.

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

    We conduct our business in a manner that allows us to avoid being regulated as an investment company under the Investment Company Act. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring "mortgages and other liens on and interests in real estate." Under the SEC's current interpretation, qualification for this exemption requires us to maintain at least 55% of our assets directly in specific types of real estate interests, including, among other things, mortgage loans and qualifying pass-through certificates, which are securities representing interests in "pools" of mortgage loans secured by residential real property in which payments of both interest and principal on the securities are generally made monthly. In order to constitute a qualifying real estate interest under this 55% requirement, a real estate interest must meet various criteria. For instance, unless the mortgage securities in which we may invest represent all the certificates issued with respect to an underlying pool of mortgage loans, they may be treated as securities separate from the underlying mortgage loans. Thus, in attempting to avoid being regulated as an investment company under the Investment Company Act, we may forego acquiring otherwise attractive mortgage-related assets. If we fail to continue to qualify for an exemption from registration as an investment company, our ability to use leverage would be substantially reduced and we would be unable to conduct our business as planned.

Risks Related to Our Securities and Other Matters

Our stock price may be volatile, which could result in substantial losses for our stockholders.

    The market price of our common stock could be subject to wide fluctuations in response to a number of factors, including:

•

issuing new equity securities pursuant to this offering or otherwise;



•

the amount of our common stock outstanding and the trading volume of our stock;



•

actual or anticipated changes in our future financial performance;



•

changes in financial estimates of us by securities analysts;



•

competitive developments, including announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;



•

the operating and stock performance of our competitors;



•

changes in interest rates; and



•

additions or departures of key personnel at the management company.

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We may incur excess inclusion income that would increase the tax liability of our stockholders.

    In general, dividend income that a tax-exempt entity receives from us should not constitute unrelated business or trade income as defined in Section 512 of the tax code, or UBTI. If, however, we realize excess inclusion income and allocate it to stockholders, this income cannot be offset by net operating losses. If the stockholder is a tax-exempt entity, then this income would be fully taxable as UBTI under Section 512 of the tax code. If the stockholder is foreign, then it would be subject to federal income tax withholding on this income without reduction pursuant to any otherwise applicable income-tax treaty.

    Excess inclusion income would be generated if we were to issue debt obligations with two or more maturities and the terms of the payments on these obligations bore a relationship to the payments that we received on our mortgage-related assets securing those debt obligations. We generally structure our borrowing arrangements in a manner designed to avoid generating significant amounts of excess inclusion income. We do, however, enter into various reverse repurchase agreements that have differing maturity dates and afford the lender the right to sell any pledged mortgage securities if we default on our obligations. The IRS may determine that these borrowings give rise to excess inclusion income that should be allocated among stockholders. Furthermore, some types of tax-exempt entities, including, without limitation, voluntary employee benefit associations and entities that have borrowed funds to acquire their shares of our common stock, may be required to treat a portion of or all of the dividends they may receive from us as UBTI. We also invest in equity securities of other REITs. If we were to receive excess inclusion income from another REIT, we may be required to distribute the excess inclusion income to our shareholders which may result in the recognition of UBTI.

Our charter does not permit ownership of over 9.8% of our common or preferred stock and attempts to acquire our common or preferred stock in excess of the 9.8% limit are void.

    For the purpose of preserving our REIT qualification and for other reasons, our charter prohibits direct or constructive ownership of more than 9.8% of the lesser of the total number or value of the outstanding shares of our common stock or more than 9.8% of the outstanding shares of our preferred stock. Our charter's constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of 9.8% of the outstanding stock, and thus be subject to our charter's ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit shall be void, and will result in the shares being transferred by operation of law to a charitable trust.

Because provisions contained in Maryland law, our charter, our bylaws and our stockholder rights plan may have an anti-takeover effect, investors may be prevented from receiving a "control premium" for their shares.

    Provisions contained in our charter and bylaws, as well as Maryland corporate law, may have anti-takeover effects that delay, defer or prevent a takeover attempt, which may prevent stockholders from receiving a "control premium" for their shares. For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders to receive a premium for their common stock over then-prevailing market prices. These provisions include the following:

    Ownership limit.  The ownership limit in our charter limits related investors, including, among other things, any voting group, from acquiring over 9.8% of our common stock without our permission.

14

    Preferred stock.  Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions are to be taken without soliciting stockholder approval.

    Staggered board.  Our board of directors is divided into three classes of directors. The terms of each class expire in different years. Directors of each class serve for a three-year term and until their successors are elected and qualified. The affirmative vote of two-thirds of all outstanding common stock is required to remove a director.

    Maryland business combination statute.  Under the Maryland General Corporation Law, some "business combinations" between a Maryland corporation and any person who owns, directly or indirectly, 10% or more of the voting power of the corporation's shares of capital stock must be approved by holders of at least 80% of the voting shares. In addition, a holder of 10% or more of the voting power of a corporation's shares may not engage in a business combination with the corporation for five years following the date he or she became a 10% holder.

    Maryland control share acquisition statute.  Maryland law provides that "control shares" of a corporation acquired in a "control share acquisition" shall have no voting rights except to the extent approved by a vote of two-thirds of the votes eligible under the statute to be cast on the matter, unless the corporation has opted out of the Control Share Acquisition statute. "Control shares" are voting shares of beneficial interest that, if aggregated with all other shares of beneficial interest previously acquired by the acquiror, would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: one-fifth or more but less than one-third, one-third or more but less than a majority or a majority of all voting powers.

    Control shares do not include shares of beneficial interest the acquiring person is then entitled to vote as a result of previously having obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to some exceptions.

    If voting rights are not approved at a stockholders meeting then, subject to some conditions and limitations, the issuer may redeem any or all of the control shares for fair value not previously approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares of beneficial interest entitled to vote, all other stockholders may exercise appraisal rights.

    Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of our common stock. However, our board of directors may decide to amend or eliminate the provision at any time in the future.

    Shareholder rights plan.  We have adopted a shareholder rights plan that may discourage any investor from acquiring over 15% of our common stock because, upon this type of acquisition without board approval, all other common stockholders will have the right to purchase a specified amount of our common stock at a 50% discount from the market price. Our shareholder rights plan is incorporated by reference as an exhibit to the registration statement of which this prospectus is a part.

Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend distributions, may adversely affect the market price of our common stock.

    In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute

15

the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, would have a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock or diluting their stock holdings in us.

We have not developed or implemented a disaster recovery plan for our information systems, which could adversely affect business operations should a major physical disaster occur.

    We are dependent upon functioning information systems to conduct business. A system failure or malfunction may result in an inability to process transactions or otherwise lead to disrupted operations. Although we regularly backup our programs and data, we do not currently have a comprehensive disaster recovery plan providing a hot site facility for immediate system recovery should a major physical disaster occur at our executive offices.

16

USE OF PROCEEDS

    We intend to use the net proceeds from the sale of our common stock in this offering to purchase mortgage-related assets consistent with our investment policy. The net proceeds from the sale of 2,700,000 shares of our common stock in this offering will be approximately $25.5 million, based on an assumed public offering price of $10.10 per share and after deducting the underwriting discounts and commissions and estimated expenses of the offering, assuming the underwriter does not exercise its over-allotment option. Pending full investment in the desired mix of mortgage-related assets, funds will be committed to short-term investments.

17

MARKET PRICE AND DIVIDENDS ON OUR COMMON STOCK

Market Information

    Commencing December 4, 1997, our common stock traded on the New York Stock Exchange. Effective February 8, 2001, we ceased trading on the New York Stock Exchange and commenced trading our common stock on the American Stock Exchange under the symbol "AXM." As of the date of this prospectus, the approximate number of record holders of our common stock is 65. The last reported sale price of our common stock on the American Stock Exchange on November 26, 2001 was $10.10 per share. The following table sets forth the high and low closing sale prices for our common stock for the 12 months ending December 31, 2000 and 1999 and through November 26, 2001.

	1999 Closing Sale Prices				2000 Closing Sale Prices				2001 Closing Sale Prices
	High		Low		High		Low		High		Low
1st Quarter	$	13.50	$	9.88	$	10.56	$	8.75	$	9.73	$	6.89
2nd Quarter	$	13.94	$	12.13	$	10.19	$	8.50	$	11.69	$	9.10
3rd Quarter	$	13.56	$	11.50	$	9.00	$	7.06	$	12.46	$	9.90
4th Quarter	$	12.69	$	10.06	$	7.35	$	6.80	$	11.62	$	10.05

Dividends

    We pay cash dividends on a quarterly basis. We declared total cash dividends to the holders of our common stock for the three months ending December 31, 2001 and the fiscal years ended December 31, 2000 and 1999, of $0.45 per share, $1.51 per share and $1.72 per share, respectively. The following table lists the cash dividends declared on each share of our common stock for our most recent 16 fiscal quarters.

		Cash Dividends Declared Per Share
2001
	Fourth Quarter ending December 31, 2001	$	0.45
	Third Quarter ended September 30, 2001	$	0.40
	Second Quarter ended June 30, 2001	$	0.40
	First Quarter ended March 31, 2001	$	0.35
2000
	Fourth Quarter ended December 31, 2000	$	0.35
	Third Quarter ended September 30, 2000	$	0.35
	Second Quarter ended June 30, 2000	$	0.35
	First Quarter ended March 31, 2000	$	0.46
1999
	Fourth Quarter ended December 31, 1999	$	0.46
	Third Quarter ended September 30, 1999	$	0.46
	Second Quarter ended June 30, 1999	$	0.42
	First Quarter ended March 31, 1999	$	0.38
1998
	Fourth Quarter ended December 31, 1998	$	0.30
	Third Quarter ended September 30, 1998	$	0.27
	Second Quarter ended June 30, 1998	$	0.25
	First Quarter ended March 31, 1998	$	0.25

    We intend to pay quarterly dividends and to make distributions to our stockholders of all or substantially all of our taxable income each year, subject to some adjustments, so as to qualify for the tax benefits accorded to a REIT under the tax code. All distributions will be made by us at the discretion of our board of directors and will depend on our taxable earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time.

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CAPITALIZATION

    The following table sets forth our capitalization at September 30, 2001, (i) on an actual basis, (ii) as adjusted for the issuance of 6,095,000 shares of our common stock in October 2001, and (iii) as adjusted for both (ii) and to give effect to the issuance of 2,700,000 shares of our common stock in this offering at an assumed public offering price of $10.10 per share, assuming that the underwriter does not exercise its over-allotment option.

		September 30, 2001
		Actual			As Adjusted(1)			As Adjusted(1)(2)
		(In thousands, except share data)
Stockholders' Equity:
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; no shares outstanding		$	—		$	—		$	—
Common stock, par value $0.01 per share; 100,000,000 authorized; 5,753,000 shares issued and outstanding; 11,848,000 shares issued and outstanding as adjusted(1); 14,548,000 shares issued and outstanding as adjusted(2)			58			118			145
Additional paid-in capital			82,831			139,649			165,107
Accumulated deficit			(34,998	)		(34,998	)		(34,998	)
Accumulated other comprehensive income(3)			4,559			4,559			4,559
	Total stockholders' equity	$	52,450		$	109,328		$	134,813

(1)

Adjusted for the issuance of 6,095,000 shares in October 2001, with net proceeds of $56,878,000 after deducting underwriting discounts, commissions and other estimated expenses.

(2)

Adjusted for the issuance of 2,700,000 shares offered hereby after deducting underwriting discounts, commissions and estimated offering expenses payable by us. Assumes no exercise of the underwriter's over-allotment option to purchase up to an additional 405,000 shares of our common stock.

(3)

Represents unrealized gains resulting from marked-to-market adjustments on our available-for-sale securities, including the impact of impairment charges recorded in prior periods.

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SELECTED FINANCIAL DATA

The selected financial data as of December 31, 2000 and 1999 and the three years in the period ended December 31, 2000 are derived from our audited financial statements incorporated by reference and included in this prospectus. The selected financial data as of December 31, 1998 and 1997 and for the year ended December 31, 1998 and the period from December 9, 1997 to December 31, 1997 are derived from audited financial statements not included in this prospectus. The selected financial data for the nine months ended September 30, 2000 and 2001 are derived from our unaudited financial statements for these periods. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. Interim results are not necessarily indicative of the result for a full year. You should read this selected financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited and unaudited financial statements and notes thereto that are included in this prospectus beginning on page F-1.

		Period From December 9 to December 31,		Year Ended December 31,							Nine Months Ended September 30,
		1997		1998		1999		2000			2000			2001
		(in thousands, except for per share data)
Statement of Operations Data:
Interest income		$	428	$	41,975	$	52,517	$	42,834		$	32,610		$	30,612
Interest expense			111		36,007		42,345		33,779			25,878			16,260
Net interest income			317		5,968		10,172		9,055			6,732			14,352
Dividend income			—		636		2,387		1,139			909			656
Total operating income			317		6,604		12,559		10,194			7,641			15,008
General and administrative expenses(1)			167		2,104		3,385		1,734			1,444			936
Net operating income(2)			150		4,500		9,174		8,460			6,197			14,072
Net gain (loss) on investment transactions(3)			—		1,047		1,938		(36,703	)		(37,444	)		(4,431	)
Reclassification of previously unrealized gains(4)			—		—		—		—			—			1,742
Cumulative effect of change in accounting principle(5)			—		—		—		—			—			(2,173	)
Net income (loss)		$	150	$	5,547	$	11,112	$	(28,243	)	$	(31,247	)	$	9,210
Net income (loss) per basic share		$	0.02	$	0.90	$	1.93	$	(4.91	)	$	(5.43	)	$	1.60
Net income (loss) per diluted share			0.02		0.90		1.92		(4.91	)		(5.43	)		1.58
Dividends declared per share		$	0.04	$	1.07	$	1.72	$	1.51		$	1.16		$	1.15
Weighted average number of shares outstanding:
	Basic		6,700,100		6,190,000		5,753,000		5,753,000			5,753,000			5,753,000
	Diluted		6,700,100		6,190,000		5,779,000		5,753,000			5,753,000			5,846,000

(1)

General and administrative expenses include incentive compensation of $619 and $1,714 to TCW Investment Management Company for the years ended December 31, 1998 and 1999, respectively. No incentive compensation was recorded for the other periods.

(2)

Net operating income represents interest income earned on fixed-income securities less cost of borrowings on reverse repurchase agreements plus dividend income from equity securities less general and administrative expenses. The cost of hedging the portfolio of fixed-income securities with short positions on United States treasury notes is not included in net operating income, but is instead included in net gain (loss) on investment transactions. If the cost of hedging the portfolio of fixed-income securities with short positions on United States treasury notes were included in the net operating income calculations, the Company's net operating income would be reduced.

(3)

Includes (i) a loss of $6,558 relating to sales of mortgage-backed securities in the second quarter of 2000 and (ii) a non-recurring impairment charge of $30,077 in the third quarter of 2000, primarily on fixed-rate mortgage securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Losses Incurred During 2000."

(4)

In conjunction with the adoption of SFAS No. 133 on January 1, 2001, we reclassified mortgage securities from the available-for-sale category to the trading category for investments accounted for under SFAS No. 115, resulting in the reclassification of $1,742 net unrealized gains from accumulated other comprehensive income to current income.

(5)

In conjunction with the adoption of SFAS No. 133 on January 1, 2001, we reclassified $2,173 of net losses on unrealized and deferred gains and losses on investment securities and forward contracts from accumulated other comprehensive income to current income.

20

	At December 31,
									At September 30, 2001
	1997		1998		1999		2000
	(in thousands, except for per share data)
Balance Sheet Data:
Fixed-income securities	$	265,880	$	829,712	$	701,143	$	600,131	$	521,664
Equity securities		—		16,422		17,481		9,068		11,954
Total assets		271,307		865,478		735,745		614,073		539,466
Reverse repurchase agreements		87,818		767,908		672,660		545,434		479,790
Total liabilities		178,310		777,448		679,704		569,690		487,016
Stockholders' equity	$	92,997	$	88,030	$	56,041	$	44,383	$	52,450
Book value per share	$	13.88	$	15.30	$	9.74	$	7.71	$	9.12

21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

You should read this section together with the section entitled "Material Changes" and our audited and unaudited financial statements and notes thereto included in this prospectus.

General

    We were incorporated in Maryland on September 15, 1997, primarily to acquire United States agency and other highly-rated, single-family real estate fixed-rate and adjustable-rate mortgage-related assets. We commenced operations on December 9, 1997 following the initial public offering of our common stock. We use our equity capital and borrowed funds to seek to generate income based on the difference between the yield on our mortgage-related assets and the cost of our borrowings. We have elected to be taxed as a REIT under the tax code and, thus, we will not generally be subject to federal taxes on our income to the extent that we distribute our net income to our stockholders and maintain our qualification as a REIT.

Results of Operations

Three Month Period Ended September 30, 2001 Compared to September 30, 2000

    For the quarter ended September 30, 2001, our net income was $7,836,000, or $1.36 per share on a basic basis and $1.34 per share on a diluted basis, based on a weighted average of 5,753,000 and 5,846,000 shares outstanding, respectively. That compares to a net loss of $28,427,000, or $4.94 per share on both a basic and diluted basis, based on a weighted average of 5,753,000 shares outstanding for the quarter ended September 30, 2000. Net interest income for the quarter ended September 30, 2001 was $5,632,000 consisting of interest income on mortgage assets and cash balances less interest expense on reverse repurchase agreements compared to $1,980,000 for the quarter ended September 30, 2000. We reported dividend income of $162,000 from dividends on equity investments for the quarter ended September 30, 2001. We reported dividend income of $185,000 from dividends on equity investments for the quarter ended September 30, 2000.

    During the quarter ended September 30, 2001, we incurred a net gain on investment transactions of $2,409,000 which is reported in our statement of operations. This gain consisted of $2,107,000 in gains on the sale of $130,456,000 of fixed-income trading securities, a $11,566,000 gain from the net increase in fair market value of fixed-income trading securities, and $11,264,000 in net losses on closed forward contracts. We reported a net loss on investment transactions of $29,912,000 for the quarter ended September 30, 2000. This loss consisted of an impairment charge on various fixed-rate mortgage securities that may be sold prior to maturity of $21,652,000, the recognition of the associated unrealized loss and deferred hedging losses on the impaired assets of $8,425,000 and a gain of $165,000 on the sale of equity securities.

    We incurred operating expenses of $367,000 for the quarter ended September 30, 2001 consisting of management fees, audit, tax, legal, printing, insurance and other expenses compared to $680,000 for the quarter ended September 30, 2000.

22

    The following table reflects the average balances for each category of our interest earning assets as well as our interest bearing liabilities, with the corresponding effective yield or rate of interest annualized.

		For the Quarter Ended September 30, 2001				For the Quarter Ended September 30, 2000
		Average Balance		Effective Yield		Average Balance		Effective Yield
				(dollars in thousands)
Interest earning assets:
	Mortgage securities	$	501,366	7.62	%	$	570,523	6.52	%
	Other fixed-income assets		6,418	16.24	%		6,881	14.94	%
	Cash and cash equivalents		2,173	4.42	%		1,510	5.56	%
	Total interest earning assets		509,957	7.71	%		578,914	6.62	%
Interest bearing liabilities:
	Reverse repurchase agreements		491,563	3.42	%		522,145	5.82	%
Net interest earning assets and spread		$	18,394	4.29	%	$	56,769	0.80	%

    The effective yield data is computed by dividing the annualized net interest income or expense, including some hedging transactions as applicable, into the average daily balance shown.

    The following table reflects the average balances for our equity securities.

	For the Quarter Ended September 30, 2001				For the Quarter Ended September 30, 2000
	Average Balance		Effective Dividend Yield		Average Balance		Effective Dividend Yield
	(dollars in thousands)
Equity securities	$	11,368	5.70	%	$	13,354	5.54	%

Nine Month Period Ended September 30, 2001 Compared to September 30, 2000

    For the nine months ended September 30, 2001, our net income was $9,210,000, or $1.60 per share on a basic basis and $1.58 per share on a diluted basis, based on a weighted average of 5,753,000 and 5,846,000 shares outstanding, respectively. That compares to a net loss of $31,247,000 or $5.43 per share on both a basic and diluted basis, based on a weighted average of 5,753,000 shares outstanding for the nine months ended September 30, 2000. Net interest income for the nine months ended September 30, 2001 was $14,352,000 consisting of interest income on fixed-income securities and cash balances less interest expense on reverse repurchase agreements compared to $6,732,000 for the nine months ended September 30, 2000. We reported dividend income of $656,000 from dividends on equity investments for the nine months ended September 30, 2001 compared to $909,000 for the nine months ended September 30, 2000.

    We incurred operating expenses of $936,000 for the nine months ended September 30, 2001 consisting of management fees, professional, printing, insurance and other expenses. For the nine months ended September 30, 2000, we incurred operating expenses of $1,444,000 consisting of management fees, professional, printing, insurance and other expenses.

    During the nine months ended September 30, 2001, we incurred a net loss on investment transactions of $4,431,000 which is reported in our statement of operations. This loss consisted of a $65,000 gain on the sale of $1,712,000 of equity securities, a realized $6,418,000 gain on the sale of $332,373,000 of fixed-income trading securities, a reported gain of $11,603,000 from the net increase in

23

fair market value of fixed-income trading securities and a realized $22,517,000 net loss on closed forward contracts. We realized a net loss of $37,444,000 on investment transactions for the nine months ended September 30, 2000. The loss consisted of an impairment charge on certain fixed-rate mortgage securities that may be sold prior to maturity of $21,652,000, the recognition of the associated unrealized loss and deferred hedging losses on the impaired assets of $8,425,000 and a net loss of $7,367,000 on the sale of mortgage and equity securities.

    On January 1, 2001, we adopted Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities and the related amendments. This adoption resulted in a transition adjustment that reclassified $2,173,000 of net losses on unrealized and deferred gains and losses on investment securities and forward contracts from accumulated other comprehensive income to current income. Also, deferred gains on interest rate swaps previously designated as hedges were reclassified from other liabilities to accumulated other comprehensive income.

    Also on January 1, 2001, we reclassified $594,469,000 of our mortgage securities from the available-for-sale category to the trading category for investments accounted for under SFAS No. 115. This change resulted in the reclassification of $1,742,000 net unrealized gains from accumulated other comprehensive income to current income, in addition to net unrealized gains included in the SFAS No. 133 transition adjustment discussed above.

    No such accounting changes were made during the nine months ended September 30, 2000.

    The following table reflects the average balances for each category of our interest earning assets as well as our interest bearing liabilities, with the corresponding effective yield or rate of interest annualized.

		For the Nine Months Ended September 30, 2001				For the Nine Months Ended September 30, 2000
		Average Balance		Effective Yield		Average Balance		Effective Yield
		(dollars in thousands)
Interest earning assets:
	Mortgage securities	$	538,233	7.35	%	$	637,532	6.61	%
	Other fixed-income assets		6,549	17.54	%		7,015	15.89	%
	Cash and cash equivalents		3,173	3.99	%		4,129	5.91	%
	Total interest earning assets		547,955	7.45	%		648,676	6.70	%
Interest bearing liabilities:
	Reverse repurchase agreements		527,028	4.11	%		589,618	5.85	%
Net interest earning assets and spread		$	20,927	3.34	%	$	59,058	0.85	%

    The effective yield data is computed by dividing the annualized net interest income or expense, including some hedging transactions as applicable, into the average daily balance shown.

    The following table reflects the average balances for our equity securities.

	For the Nine Months Ended September 30, 2001				For the Nine Months Ended September 30, 2000
	Average Balance		Effective Dividend Yield		Average Balance		Effective Dividend Yield
	(dollars in thousands)
Equity securities	$	12,300	7.11	%	$	16,438	7.37	%

24

Year Ended December 31, 2000 Compared to 1999

    For the year ended December 31, 2000, our net loss was $28,243,000, or $4.91 per share on both a basic and diluted basis, based on a weighted average of 5,753,000 shares outstanding. These figures compare to our net income of $11,112,000, or $1.93 per share on a basic basis and $1.92 on a diluted basis, based on a weighted average of 5,753,000 and 5,779,000 shares outstanding, respectively, for the year ended December 31, 1999. Our net interest income for the year ended December 31, 2000 was $9,055,000 consisting of interest income on mortgage assets and cash balances, less interest expense on reverse repurchase agreements, compared to $10,172,000 for the year ended December 31, 1999. We reported dividend income of $1,139,000 from dividends on equity investments for the year ended December 31, 2000, compared to $2,387,000 for the year ended December 31, 1999. We reported net losses on investment transactions of $36,703,000 consisting primarily of an impairment charge of $18,284,000 on certain fixed-rate mortgage securities that may be sold prior to maturity, an impairment charge of $4,326,000 on some equity securities, the recognition of the associated unrealized loss and deferred hedging losses on the impaired assets of $8,425,000, a loss of $5,795,000 on the sale of $193,953,000 of fixed-income securities and a gain of $127,000 on the sale of equity securities during the year ended December 31, 2000. We realized a net gain of $1,938,000, primarily from the sale of equity investments, for the year ended December 31, 1999. We incurred operating expenses of $1,734,000 for the year ended December 31, 2000 consisting of incentive fees, management fees, audit, tax, legal, printing, insurance and other expenses compared to $3,385,000 for the year ended December 31, 1999.

    The following table reflects the average balances for each category of our interest earning assets as well as our interest bearing liabilities, with the corresponding effective yield or rate of interest annualized for the periods indicated.

		For the Year Ended December 31, 2000				For the Year Ended December 31, 1999
		Average Balance		Effective Yield		Average Balance		Effective Yield
				(dollars in thousands)
Interest earning assets:
	Mortgage securities	$	622,350	6.67	%	$	772,464	6.65	%
	Other fixed-income assets		6,945	16.09	%		5,822	14.40	%
	Cash and cash equivalents		3,588	4.96	%		6,322	4.76	%
	Total interest earning assets		632,883	6.76	%		784,608	6.69	%
Interest bearing liabilities
	Reverse repurchase agreements		576,190	5.86	%		732,960	5.78	%
Net interest earning assets and spread		$	56,693	0.91	%	$	51,648	0.91	%

    The effective yield data is computed by dividing the annualized net interest income or expense, including some hedging transactions as applicable, into the average daily balance shown.

    The following table reflects the average balances for our equity securities.

	For the Year Ended December 31, 2000				For the Year Ended December 31, 1999
	Average Balance		Effective Dividend Yield		Average Balance		Effective Dividend Yield
	(dollars in thousands)
Equity securities	$	15,578	7.31	%	$	18,763	12.73	%

25

Losses Incurred During 2000

    During the second quarter of 2000, in response to the added risk associated with an overall increase in interest rate and mortgage spread volatility, we sold $96,513,000 of our mortgage-backed securities. Specifically, at the beginning of the second quarter 2000, we owned a portfolio of primarily fixed-rate mortgage securities financed by approximately 92% short-term borrowings and 8% equity capital. As interest rates rose significantly during the quarter, the value of the mortgage securities in the portfolio declined. Although we had entered into short positions on United States treasury notes as part of our hedging strategy, the value of mortgage securities in general declined more than that of comparable treasuries during the period. Accordingly, the decline in value of our mortgage securities was greater than the offsetting gains we recognized from hedging. This net decline in value increased the effective leverage, and therefore risk, of our portfolio as the ratio of debt-to-equity increased. Assets were then sold in order to decrease our debt-to-equity ratio since asset sales decrease debt but do not decrease equity on a fully marked-to-market basis. The asset sales resulted in a loss of $6,558,000, which represented the difference between the sale proceeds and the amortized cost of the assets sold.

    During the third quarter of 2000, we recorded an impairment charge of $30,077,000, primarily on our fixed-rate mortgage securities, including a charge for the related deferred hedging losses. The impairment charges represented an other-than-temporary decline in the fair value, as of September 30, 2000, of investments held that we no longer intended to hold until maturity. We made the decision not to hold the securities until maturity in order to take advantage of other opportunities in the marketplace that we deemed potentially more attractive. Specifically, the value of certain of our mortgage securities were trading at higher valuations than other mortgage securities available in the market place with similar risk reward profiles. Further, the cost basis yield of the existing portfolio, including the impact of deferred hedging costs prior to the impairment charge, was generally expected to be below that of funding costs at that time. Accordingly, the strategy of selling assets with lower cost basis yields in favor of purchasing assets with current market yields was designed to improve operating earnings in future periods.

Year Ended December 31, 1999 Compared to 1998

    For the year ended December 31, 1999, our net income was $11,112,000, or $1.93 per share on a basic basis and $1.92 on a diluted basis, based on a weighted average of 5,753,000 and 5,779,000 shares outstanding, respectively. These figures compare to $5,547,000, or $0.90 per share on both a basic and diluted basis, based on a weighted average of 6,190,000 shares outstanding for the year ended December 31, 1998. Our net interest income for the year ended December 31, 1999 was $10,172,000, consisting of interest income on mortgage assets and cash balances, less interest expense on reverse repurchase agreements, compared to $5,968,000 for the year ended December 31, 1998. We reported dividend income of $2,387,000 from dividends on equity investments for the year ended December 31, 1999 compared to $636,000 for the year ended December 31, 1998. We reported a net gain on investment transactions of $1,938,000, primarily from the sale of equity securities during the year ended December 31, 1999. We realized a net gain of $1,047,000, primarily from the sale of mortgage-backed securities and other investments for the year ending December 31, 1998. We incurred operating expenses of $3,385,000 for the year ended December 31, 1999, consisting of incentive fees, management fees, audit, tax, legal, printing, insurance and other expenses, compared to $2,104,000 for the year ended December 31, 1998.

26

    The following table reflects the average balances for each category of our interest earning assets as well as our interest bearing liabilities, with the corresponding effective yield or rate of interest annualized.

		For the Year Ended December 31, 1999				For the Year Ended December 31, 1998
		Average Balance		Effective Yield		Average Balance		Effective Yield
				(dollars in thousands)
Interest earning assets:
	Mortgage securities	$	772,464	6.65	%	$	670,559	6.13	%
	Other fixed-income assets		5,822	14.40	%		1,324	14.37	%
	Cash and cash equivalents		6,322	4.76	%		13,923	5.10	%
	Total interest earning assets		784,608	6.69	%		685,806	6.12	%
Interest bearing liabilities:
	Reverse repurchase agreements		732,960	5.78	%		624,865	5.76	%
Net interest earning assets and spread		$	51,648	0.91	%	$	60,941	0.36	%

    The effective yield data is computed by dividing the annualized net interest income or expense, including some hedging transactions as applicable, into the average daily balance shown.

    The following table reflects the average balances for our equity securities.

	For the Year Ended December 31, 1999				For the Year Ended December 31, 1998
	Average Balance		Effective Dividend Yield		Average Balance		Effective Dividend Yield
	(dollars in thousands)
Equity securities	$	18,763	12.73	%	$	3,718	17.10	%

    The effective yield data is computed by dividing the annualized net interest income or expense into the average daily balance shown.

Financial Condition

Fixed-Income Securities

    At September 30, 2001, December 31, 2000 and December 31, 1999, we held $521,664,000, $600,131,000 and $701,143,000 of fixed-income securities, respectively. The original maturity of a significant portion of the fixed-income securities ranges from 15 to 30 years; the actual maturity is subject to change based on the prepayments of the underlying mortgage loans.

27

    The following table is a schedule of fixed-income securities held as available-for-sale listed by security type.

						December 31, 2000				December 31, 1999
		September 30, 2001
								Percent of Total Securities Available-for- Sale				Percent of Total Securities Available-for- Sale
Fixed-Income Securities Available-for Sale		Carrying Value		Percent of Total Securities Available-for-sale		Carrying Value				Carrying Value
		(dollars in thousands)
Mortgage Securities:
	Adjustable-rate (1)		—	0.00	%	$	40,253	6.71	%	$	32,256	4.50	%
	Fixed-rate		—	0.00	%		554,216	92.35	%		662,348	94.50	%
Other fixed-income securities		$	5,722	100.00	%		5,662	0.94	%		6,539	1.00	%
	Totals	$	5,722	100.00	%	$	600,131	100.00	%	$	701,143	100.00	%

    The following table is a schedule of fixed-income trading securities at September 30, 2001 listed by security type.

		September 30, 2001
Fixed-Income Trading Securities		Carrying Value		Percent of Total Securities Held- for-Trading
		(dollars in thousands)
Mortgage Securities:
	Adjustable-rate	$	17,269	3.35	%
	Fixed-rate		498,673	96.65	%
	Totals	$	515,942	100.00	%

    The following table shows various weighted average characteristics of the fixed-income securities held as available-for-sale by us at September 30, 2001.

Security Type	Par Amount		Par as a Percent of Category		Adjusted Cost Basis		Market Price		Current Coupon		Weighted Average Life(2)
Other fixed-income securities	$	10,400	100.00	%	61.33	%	55.02	%	14.32	%	1.0

    The following table shows various weighted average characteristics of the fixed-income trading securities held by us at September 30, 2001.

Security Type	Par Amount		Par as a Percent of Category		Adjusted Cost Basis		Market Price		Current Coupon		Weighted Average Life(2)
	(dollars in thousands)
20-year agency pass-throughs	$	202,334	40.06	%	97.28	%	102.59	%	6.50	%	2.5
30-year agency pass-throughs		192,228	38.06	%	99.96	%	101.66	%	6.54	%	3.6
AAA CMOs		93,638	18.54	%	95.36	%	102.18	%	6.69	%	1.0
Total fixed-rate holdings		488,200	96.66	%	97.97	%	102.15	%	6.55	%	2.7
Adjustable-rate holdings		16,906	3.34	%	100.56	%	102.15	%	7.35	%	1.0
Category total	$	505,106	100.00	%	98.05	%	102.15	%	6.58	%	2.6

(1)

At December 31, 2000 and 1999, the interest rate indices for 97% and 3% of the adjustable-rate mortgage securities were based on the one-year United States treasury rate and the six-month London Inter-Bank Offered Rate, respectively.

(2)

The weighted average life of the fixed-rate mortgage securities is based upon market prepayment expectations as of the date shown. The actual weighted average life could be longer or shorter depending on the actual prepayment rates experienced over the life of the securities. The weighted average life shown for the adjustable-rate mortgage assets represents the average time until the next coupon reset date. All averages are shown in years.

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    The following table shows various weighted average characteristics of the fixed-income securities held as available-for-sale by us at December 31, 2000.

Security Type	Par Amount		Percent of Total Par Amount		Adjusted Cost Basis		Market Price		Current Coupon		Weighted Average Life(1)
			(dollars in thousands)
15-year agency/AAA pass-throughs	$	145,251	23.91	%	98.00	%	99.90	%	6.50	%	4.5
20-year agency pass-throughs		230,193	37.88	%	97.00	%	99.30	%	6.50	%	5.6
30-year agency pass-throughs		54,759	9.01	%	99.65	%	101.23	%	7.41	%	5.0
AAA CMOs		127,759	21.03	%	95.68	%	97.92	%	6.80	%	6.4
Total fixed-rate holdings	$	557,962	91.83	%	97.22	%	99.33	%	6.80	%	5.4
Other fixed-income securities		10,400	1.71	%	64.31	%	54.44	%	15.89	%	1.8
Adjustable-rate holdings		39,253	6.46	%	102.49	%	102.55	%	8.00	%	0.6
Category total	$	607,615	100.00	%	96.99	%	98.77	%	6.90	%	5.1

(1)

The weighted average life of the fixed-rate mortgage securities is based upon market prepayment expectations as of the date shown. The actual weighted average life could be longer or shorter depending on the actual prepayment rates experienced over the life of the securities. The weighted average life shown for the adjustable-rate mortgage assets represents the average time until the next coupon reset date. All averages are shown in years.

    The following table shows various weighted average characteristics of the fixed-income securities held as available-for-sale by us at December 31, 1999.

Security Type	Par Amount		Percent of Total Par Amount		Adjusted Cost Basis		Market Price		Current Coupon		Weighted Average Life(1)
			(dollars in thousands)
15-year agency/AAA pass-throughs	$	167,717	23.00	%	100.49	%	97.30	%	6.50	%	5.1
20-year agency pass-throughs		251,819	34.50	%	100.46	%	96.26	%	6.50	%	6.4
30-year agency pass-throughs		31,424	4.30	%	101.36	%	95.98	%	6.99	%	7.7
AAA CMOs		237,202	32.40	%	99.76	%	95.53	%	6.82	%	7.2
Total fixed-rate holdings	$	688,162	94.20	%	100.26	%	96.25	%	6.63	%	6.4
Other fixed-income securities		10,400	1.40	%	69.38	%	62.88	%	15.53	%	2.1
Adjustable-rate holdings		31,923	4.40	%	101.73	%	101.04	%	6.62	%	1.0
Category total	$	730,485	100.00	%	99.89	%	95.88	%	6.76	%	6.1

(1)

The weighted average life of the fixed-rate mortgage securities is based upon market prepayment expectations as of the date shown. The actual weighted average life could be longer or shorter depending on the actual prepayment rates experienced over the life of the securities. The weighted average life shown for the adjustable-rate mortgage assets represents the average time until the next coupon reset date. All averages are shown in years.

Equity Securities

    At September 30, 2001, December 31, 2000 and December 31, 1999 we held $11,954,000, $9,068,000 and $17,481,000 of equity securities held as available-for-sale, respectively. Equity securities consist primarily of investments in equities issued by other real estate investment trusts.

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    At September 30, 2001, equity securities consisted of the following.

			Shares Held	Adjusted Cost		Fair Value
			(in thousands)
Common Stock:
	Dynex Capital, Inc.		75	$	122	$	184
		Total common stock			122		184
Convertible Preferred Stock:
	Capstead Mortgage Corporation, Series B		515		4,365		6,180
	Dynex Capital, Inc., Series A		53		420		866
	Dynex Capital, Inc., Series B		150		1,167		2,520
	Dynex Capital, Inc., Series C		108		968		2,204
		Total convertible preferred stock			6,920		11,770
Total equity securities				$	7,042	$	11,954

    At December 31, 2000, equity securities consisted of the following.

			Shares Held	Adjusted Cost		Fair Value
			(in thousands)
Common Stock:
	American Residential Investment Trust, Inc.		109	$	611	$	238
	Anworth Mortgage Asset Corporation		222		994		900
	Dynex Capital, Inc.		75		122		75
Total common stock					1,727		1,213
Convertible Preferred Stock:
	Capstead Mortgage Corporation, Series B		520		4,408		5,492
	Dynex Capital, Inc., Series A		53		420		427
	Dynex Capital, Inc., Series B		150		1,167		1,088
	Dynex Capital, Inc., Series C		108		968		848
		Total convertible preferred stock			6,963		7,855
Total equity securities				$	8,690	$	9,068

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    At December 31, 1999, equity securities consisted of the following.

			Shares Held	Adjusted Cost		Fair Value
			(in thousands)
Common Stock:
	American Residential Investment Trust, Inc.		109	$	611	$	748
	Anthracite Capital, Inc.		500		3,071		3,188
	Anworth Mortgage Asset Corporation		222		994		997
	Dynex Capital, Inc.		75		1,080		483
	Hanover Capital Mortgage Holdings, Inc.		385		1,842		1,396
	Impac Commercial Holdings, Inc.		249		1,441		1,307
		Total common stock			9,039		8,119
Convertible Preferred Stock:
	Capstead Mortgage Corporation, Series B		520		4,408		4,940
	Dynex Capital, Inc., Series A		53		920		715
	Dynex Capital, Inc., Series B		150		2,711		1,987
	Dynex Capital, Inc., Series C		108		2,292		1,720
		Total convertible preferred stock			10,331		9,362
Total equity securities				$	19,370	$	17,481

Hedging Instruments

    We may elect not to enter into hedging activities or, if we do enter into hedging activities, they may not have the desired beneficial impact on our results of operations or financial condition. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates and prepayment rates.

    Hedging involves risk and typically involves costs, including transaction costs. These costs increase dramatically as the period covered by the hedging increases and during periods of rising and volatile interest rates. We may increase our hedging activity, and thus increase our hedging costs during these periods when interest rates are volatile or rising and hedging costs have increased. In general, we intend to hedge as much of the interest rate risk as the management company determines is in the best interest of our stockholders given the cost of the hedging transactions and our desire to maintain our REIT status. Our policies do not contain specific requirements as to the percentages or amount of interest rate risk that the management company is required to hedge.

    At September 30, 2001, we had open forward contracts to sell United States treasury notes with terms stated below (dollars in thousands).

Current Notional Amount		Average Contract Price	Fair Value of Contracts		Average Termination Date	Unrealized Gains (Losses)
$	288,000	102.281	$	295,557	10/22/2001	$	(987	)

    At December 31, 2000, we had open forward contracts to sell United States treasury notes with terms stated below (dollars in thousands).

Current Notional Amount		Average Contract Price	Fair Value of Contracts		Average Termination Date	Unrealized Gains (Losses)
$	575,000	101.099	$	585,048	1/19/2001	$	(3,731	)

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    At December 31, 1999, we had open forward contracts to sell United States treasury notes with terms stated below (dollars in thousands).

Current Notional Amount		Average Contract Price	Fair Value of Contracts		Average Termination Date	Unrealized Gains
$	335,000	99.278	$	336,492	2/12/2000	$	3,909

    The contracts were entered into to mitigate the negative impact of rising interest rates on certain fixed-income securities that generally have a market weighted average duration approximately equal to the contracts shown above.

Liabilities

    We have entered into reverse repurchase agreements to finance certain of our mortgage-backed securities. These agreements are secured by a portion of our mortgage-backed securities and bear interest rates that have historically moved in close relationship to the London Inter-Bank Offered Rate.

    At September 30, 2001, we had outstanding $479,790,000 of reverse repurchase agreements with a weighted average current borrowing rate of 2.99% and a maturity of 1.0 month. The reverse repurchase agreements were collateralized by securities with an estimated fair value of $500,783,000.

    At December 31, 2000, we had outstanding $545,434,000 of reverse repurchase agreements with a weighted average current borrowing rate of 6.61% and a maturity of 1.1 months. The reverse repurchase agreements were collateralized by mortgage-backed securities with an estimated fair value of $564,274,000.

    At December 31, 1999, we had outstanding $672,660,000 of reverse repurchase agreements with a weighted average current borrowing rate of 5.98% and a maturity of 2.0 months. The reverse repurchase agreements were collateralized by mortgage-backed securities with an estimated fair value of $689,396,000.

    We had $7,226,000 and $24,256,000 of other liabilities at September 30, 2001 and December 31, 2000, respectively. These other liabilities consisted primarily of accrued interest payable, unrealized loss on forward contracts and payables for unsettled securities at September 30, 2001 and deferred gain on interest rate swaps, accrued interest payable and payables for unsettled securities at December 31, 2000. We anticipate settling all other liabilities within one year.

Other Matters

    At September 30, 2001, we held equity securities and senior unsecured notes issued by Dynex Capital, Inc. with fair market values of $5,774,000 and $4,500,000, respectively. During the year ended December 31, 1999, Dynex Capital, Inc. suspended the payment of dividends on its preferred stock. Accordingly, we are no longer recognizing dividend income on our equity investments in Dynex Capital, Inc. Dynex Capital, Inc. is currently paying interest on its senior notes. Accordingly, we are recognizing interest income on the senior note investments issued by Dynex Capital, Inc. If Dynex Capital, Inc. were to suspend payment of interest on its senior notes, interest income recognized by us would be negatively impacted.

Inflation

    Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors drive our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with generally accepted accounting principles and our dividends are determined by our net

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income as calculated for tax purposes; in each case, our activities and balance sheet are measured with reference to historical cost or fair market value without considering inflation.

Quantitative and Qualitative Disclosures About Market Risk

    Our two primary components of market risk are interest rate risk and equity price risk, as discussed below.

Interest Rate Risk

    Effect on Net Interest Income.  We invest in fixed-rate mortgage assets that we fund with short-term borrowings. During periods of rising interest rates, the borrowing costs associated with funding such fixed-rate assets are subject to increase while the income earned on such assets may remain substantially unchanged. This results in a narrowing of the net interest spread between the related assets and borrowings and may even result in losses. We may enter into derivative transactions to seek to mitigate the negative impact of a rising interest rate environment. Hedging techniques will be based, in part, on assumed levels of prepayments of our mortgage assets. If prepayments are slower or faster than assumed, the life of the mortgage assets will be longer or shorter, which would reduce the effectiveness of our hedging techniques and may result in losses on such transactions. Hedging techniques involving the use of derivative securities are highly complex and may produce volatile returns. Our hedging activity will also be limited by the asset and sources of income requirements applicable to us as a REIT.

    We also invest in adjustable-rate mortgage assets that are typically subject to periodic and lifetime interest rate caps that limit the amount an adjustable-rate mortgage asset's interest rate can change during any given period, as well as the minimum rate payable. Our borrowings will not be subject to similar restrictions. In a period of increasing interest rates, interest rates on our borrowings could increase without limitation by caps, while the interest rates on our mortgage assets are generally limited by caps. This problem will be magnified to the extent we acquire mortgage assets that are not fully indexed. Further, some adjustable-rate mortgage assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in us receiving less cash income on our adjustable-rate mortgage assets than is required to pay interest on the related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would negatively impact our financial condition, cash flows and results of operations.

    We fund a substantial portion of our acquisitions of adjustable-rate mortgage assets with borrowings that have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of the mortgage assets. Thus, in most cases the interest rate indices and repricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods, especially during the 1979-1982 and 1994 interest rate environments, when the spread between such indices was volatile. During periods of changing interest rates, this type of interest rate mismatch could negatively impact our financial condition, cash flows and results of operations.

    Extension Risk.  Fixed-rate assets are generally acquired with a projected weighted average life based on assumptions regarding prepayments. In general, when a fixed-rate mortgage asset is acquired with borrowings, we may, but we are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the related asset. This strategy is designed to protect us from rising interest rates because the borrowing costs are fixed for the duration of the asset. However, if prepayment rates decrease in a rising interest rate environment, the life of the mortgage asset could extend beyond the

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term of the swap agreement or other hedging instrument. This situation could negatively impact us as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the asset would remain fixed. This situation may also cause the market value of our mortgage assets to decline with little or no offsetting gain from the related hedging transactions. In some situations, we may be forced to sell assets and incur losses to maintain adequate liquidity.

    Prepayment Risk.  Fixed-rate assets in combination with hedging instruments are also subject to prepayment risk. In falling interest rate scenarios, the fixed-rate mortgage assets may prepay faster, shortening the average life in comparison with the related hedging instrument. If this were to happen, we would potentially need to reinvest at rates lower than that of the related hedging instrument. This situation may result in the narrowing of interest rate spreads or may cause losses.

    Prepayment rates generally increase when prevailing interest rates fall below the interest rates on existing mortgage assets. In addition, prepayment rates generally increase when the difference between long-term and short-term interest rates declines. Prepayments of mortgage assets could adversely affect our results of operations in several ways. A substantial portion of our adjustable-rate mortgage assets bear initial "teaser" interest rates that are lower than their "fully indexed" rates, or the applicable index plus a margin. In the event that this type of adjustable-rate mortgage asset is prepaid prior to or soon after the time of adjustment to a fully indexed rate, we will have held the mortgage asset while it was less profitable and lost the opportunity to receive interest at the fully indexed rate over the expected life of the adjustable-rate mortgage asset. In addition, the prepayment of any mortgage asset that we had purchased at a premium would result in the immediate write-off of any remaining capitalized premium amount and consequent reduction of our net interest income by that amount. Finally, in the event that we are unable to acquire new mortgage assets to replace the prepaid mortgage assets, our financial condition, cash flow and results of operations could be materially harmed.

    Forward Contract Risk.  We may also enter into forward contracts to sell United States treasury notes in addition to or instead of interest rate swap agreements. These forward contracts are generally expected to mitigate the impact of rising interest rates on the fair value of our fixed-income securities. However, if the interest rate spread between mortgage securities and United States treasury notes were to widen, the fair value of our portfolio would generally be expected to decline. In addition, the use of forward contracts to sell United States treasury notes generally does not directly impact borrowing costs in the same manner as interest rate swap agreements. Therefore, the use of such forward contracts could result in net income volatility during periods of interest rate volatility.

    Effect on Fair Value.  Another component of interest rate risk is the effect changes in interest rates will have on the market value of our assets. This is the risk that the market value of our assets will increase or decrease at different rates than that of our liabilities, including our hedging instruments.

    We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities, including all hedging instruments. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data.

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    The following sensitivity analysis table shows the estimated impact on the fair value of our interest rate sensitive investments net of our hedging instruments and reverse repurchase agreement liabilities assuming rates instantaneously fall 100 basis points and rise 100 basis points.

	Fair Value for Scenario Shown
	Interest Rates Fall 100 Basis Points			Unchanged		Interest Rates Rise 100 Basis Points
	(dollars in thousands, except per share amounts)
Interest rate sensitive instruments	$	41,051		$	40,886	$	37,714
Change in fair value	$	165			—	$	(3,172	)
Change as a percent of fair value		0.03	%		—		(0.61	)%
Change as a percent of stockholders' equity as of September 30, 2001		0.31	%		—		(6.05	)%
Change on a per share basis	$	0.03			—	$	(0.55	)

    It is important to note that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in fair value for us could increase significantly when interest rates change beyond 100 basis points. In addition, there are other factors that impact the fair value of our interest rate sensitive investments and hedging instruments, including the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, there may be differences between the fair value changes shown above and actual changes in fair value as interest rates change, and those differences may be material.

    We have established an interest rate risk management policy that is intended to mitigate the negative impact of changing interest rates. We generally intend to mitigate interest rate risk by targeting the difference between the market weighted average duration on our mortgage-related assets funded with secured borrowings to the market weighted average duration of such borrowings to one year or less, taking into account all hedging transactions. We generally do not intend to have any specific duration target for the portion our mortgage-related assets that are not funded by secured borrowings.

    We may not be able to limit such duration differences and there may be periods of time when the duration difference will be greater than one year.

    Beginning with the quarter ended March 31, 2001, we reclassified our fixed-income securities that are generally subject to a hedging strategy from the available-for-sale category to the trading category of SFAS No. 115. This change is expected to increase the volatility of net income as both changes in the fair market value and actual realized gains and losses of the fixed-income securities and the related hedging instruments will now flow through net income each reporting period.

Equity Price Risk

    Another component of market risk for us is equity price risk, which is the risk that the market value of our equity investments will decrease. The following table shows the impact on our fair value as

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the price of our equity securities change, assuming price decreases of 10% and increases of 10%. Actual price decreases or increases may be greater or smaller.

	Fair Value for Scenario Shown
	Prices Decrease 10%			Unchanged		Prices Increase 10%
	(dollars in thousands except per share amounts)
Equity investments	$	10,759		$	11,954	$	13,149
Change in fair value	$	(1,195	)		—	$	1,195
Change as a percent of stockholders' equity		(2.3	)%		—		2.3	%
Change on a per share basis	$	(0.21	)		—	$	0.21

    Although there is no direct link between changes in fair value and changes in earnings in many cases, a decline in our fair value may translate into decreased earnings over the remaining life of our investment portfolio. If the fair market value of our portfolio were to decline significantly, our overall liquidity may be impaired, which could result in us being required to sell assets at losses. Our analysis of risks is based on management's experience, estimates, models and assumptions. These analyses rely on models of financial information which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by the management company may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in the above tables and in this prospectus. These analyses contain certain forward-looking statements and are subject to the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995.

Liquidity and Capital Resources

    Our primary sources of funds as of September 30, 2001 and December 31, 2000, consisted of reverse repurchase agreements totaling $479,790,000 and $545,434,000, respectively. We expect to continue to borrow funds in the form of reverse repurchase agreements. At September 30, 2001, we had borrowing arrangements with over 20 different investment banking firms. Increases in short-term interest rates could negatively impact the valuation of our mortgage assets which could limit our borrowing ability or cause our lenders to initiate margin calls.

    We will also rely on the cash flow from operations, primarily monthly principal and interest payments to be received on the mortgage assets, for liquidity.

    We believe that equity capital, combined with the cash flow from operations and the utilization of borrowings, will be sufficient to enable us to meet anticipated liquidity requirements. If our cash resources are at any time insufficient to satisfy our liquidity requirements, we may be required to liquidate mortgage assets or sell debt or additional equity securities. If required, the sale of mortgage assets at prices lower than the carrying value of such assets would result in losses.

    We may in the future increase our 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, other borrowings, and classes of preferred stock will be senior to our common stock in a liquidation of our company. The effect of additional equity offerings may be the dilution of stockholders' equity or the reduction of the price of shares of our common stock, or both. We are unable to estimate the amount, timing or nature of additional offerings as they will depend upon market conditions and other factors.

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OUR COMPANY

Overview

    We were incorporated in Maryland on September 15, 1997 and commenced operations on December 9, 1997. We primarily acquire United States agency and other highly-rated single-family real estate fixed-rate and adjustable-rate mortgage-related assets. We use our equity capital and borrowed funds to seek to generate income based on the difference between the yield on our mortgage-related assets and the cost of our borrowings. We have elected to be taxed as a real estate investment trust, or REIT, under the tax code and, thus, we will not generally be subject to federal taxes on our income to the extent that we distribute our net income to our stockholders and maintain our qualification as a REIT. We operate in accordance with our operating policies, which are approved by our board of directors at least annually.

    TCW Investment Management Company manages our day-to-day operations pursuant to a management agreement and the direction and oversight of our board of directors. A majority of our board of directors is unaffiliated with the management company or The TCW Group, Inc., the parent company of the management company. The management company's key officers and our investment management team are comprised of selected members of The TCW Group, Inc.'s mortgage-backed securities group, all of whom have experience in raising capital for, investing in and managing fixed-income instruments. An external management structure allows us to take advantage of the existing operational systems, expertise and economies of scale associated with the management company's current business operations. We currently have no employees.

    Pursuant to the management agreement, the management company is primarily involved in two activities:

•

asset and liability management, including acquisition, financing, hedging, management and disposition of mortgage-related assets, and credit and prepayment risk management; and

•

capital management, including oversight of our structuring, analysis, capital raising and investor relations activities.

    In conducting these activities, the management company formulates our operating strategies, arranges for the acquisition of mortgage-related assets by us, arranges for various types of financing for the acquisition of mortgage-related assets, monitors the performance of our mortgage-related assets and provides certain administrative and managerial services in connection with our operations. The management company is required to manage our business affairs in conformity with the policies that are approved and monitored by our board of directors.

    The management company receives annual base management compensation equal to ³/4 of 1% of average net invested capital. The management company is also entitled to receive incentive compensation for each fiscal year equal to 30% of our net income in excess of the amount of net income required to produce an annualized return on equity equal to the ten-year United States treasury rate plus 1%. The management agreement may be renewed for additional one-year terms at the discretion of the unaffiliated directors, unless previously terminated by us or the management company upon written notice. Except in the case of a termination or non-renewal by us for cause, upon termination or non-renewal of the management agreement, we must pay the management company a termination or non-renewal fee, which is equal to the fair market value of the management agreement without regard to our termination right, as determined by an independent appraisal.

    The management company was established in 1987 as an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The TCW Group, Inc. was established in 1971 and manages both domestic and international investments for a range of clients with diverse objectives. As of September 30, 2001, the TCW group of companies had under management or committed to management approximately $74.7 billion, of which $35.6 billion

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consisted of United States fixed-income instruments. Of that $35.6 billion of fixed-income instruments, $23.2 billion consisted of mortgage-related assets which are managed by the mortgage-backed securities group of the TCW group of companies. The majority of our executive officers are senior members of the mortgage-backed securities group.

    Our executive officers are as follows:

•

Philip A. Barach, President and Chief Executive Officer. Mr. Barach is also a Group Managing Director and Chief Investment Officer of Investment Grade Fixed Income of The TCW Group, Inc. and the management company, as well as a member of The TCW Group Inc.'s mortgage-backed securities group. Before joining The TCW Group, Inc. in 1987, Mr. Barach was employed by Sun Life Insurance Company, where he was Senior Vice President and Chief of Investments. Previously, Mr. Barach served as Head of Fixed Income Investments for the State of California Retirement System.

•

Jeffrey E. Gundlach, Vice Chairman of the Board and Chief Investment Officer. Mr. Gundlach is also a Group Managing Director of The TCW Group, Inc. and the management company. Prior to joining The TCW Group, Inc. in 1985, Mr. Gundlach was employed by Transamerica Corporation's Property/Casualty Insurance division as a Senior Loss Reserve Analyst responsible for investment discount and funding strategies.

•

David S. DeVito, Interim Chief Financial Officer and Controller. Mr. DeVito was appointed our Interim Chief Financial Officer in August 2001 and has been our Controller since March 1999. Mr. DeVito is also a Managing Director and Chief Financial Officer of The TCW Group, Inc. and the management company and certain of its affiliates. Prior to joining The TCW Group, Inc. in 1993, Mr. DeVito was a Senior Manager with Deloitte & Touche LLP, specializing in serving the investment management and securities broker/dealer industries.

•

Joseph J. Galligan, Senior Vice President. Mr. Galligan is also a Managing Director of The TCW Group, Inc. and the management company. Prior to joining The TCW Group, Inc. in 1991, Mr. Galligan was a Vice President at Smith Barney in the Mortgage-Backed Specialist Group. Prior to that time, he spent five years at First Boston as a Vice President in the same area. In addition, Mr. Galligan spent over three years at Scudder Stevens & Clark as a Portfolio Manager/Trader.

•

Michael E. Cahill, Secretary. Mr. Cahill is also a Managing Director and General Counsel of the management company, The TCW Group, Inc. and certain of its affiliates. Prior to joining TCW in 1991, Mr. Cahill was Senior Vice President and General Counsel of Act III Communications. Previously, he was in private law practice with O'Melveny & Myers and, prior to that time, with Shenas, Robbins, Shenas & Shaw in San Diego.

Our Strategy

    Our strategy is to use our expertise to acquire various types of mortgage-related assets, leverage this portfolio of mortgage-related assets to achieve higher returns on stockholders' equity and finance the purchases in the capital markets. By implementing this strategy, we expect to earn a net interest margin which would generate dividend yields that provide a competitive rate of returns for stockholders.

    We intend to acquire investments that we believe will maximize returns on capital invested after considering: (i) the amount and nature of the anticipated returns from the investment; (ii) our ability to pledge the investment to secure collateralized borrowings; and (iii) the costs associated with financing, hedging, managing, securitizing and reserving for these investments.

    We generally invest primarily in mortgage-related assets that may include short-term investments, mortgage-backed securities, high-credit quality mortgage loans, mortgage derivative securities and other

38

investments. Our purchases of these assets are financed with the net proceeds of our equity offerings and, to the extent permitted by our leverage policy, we use leverage to increase potential returns to the holders of our common stock. Our borrowings are financed primarily through reverse repurchase agreements which are generally linked to the London Inter-Bank Offered Rate.

    In order to manage and mitigate the interest rate risk associated with the purchase and leverage of our assets, we use various hedging techniques and instruments. These include interest rate swaps, forward contracts, i.e., short positions on various United States treasury notes, interest rate caps and similar financial instruments.

    In order to reduce the impact of prepayment risk in our portfolio, we intend to continue to structure a diversified portfolio with a variety of prepayment characteristics and exercise caution when purchasing mortgages with any significant market price premium. We may attempt to increase returns to our stockholders over time by: (i) raising additional capital in order to increase our ability to invest in additional mortgage-related assets, (ii) lowering our effective borrowing costs through seeking direct funding from collateralized lenders, in addition to using Wall Street intermediaries and investigating the possibility of using collateralized commercial paper and medium-term note programs, and (iii) improving the efficiency of our balance sheet structure by investigating the issuance of uncollateralized subordinated debt and other forms of capital.

    We have established the following four primary operating policies to implement our business strategy of acquiring assets consisting primarily of United States agency and other highly-rated single-family real estate mortgage securities and mortgage loans:

•

the Investment Policy;

•

the Leverage Policy;

•

the Interest Rate Risk Management Policy; and

•

the REIT Compliance Policy.

    Our compliance with these policies is determined at the time of our purchase of the mortgage-related assets, based on the management company's most recent valuation of the assets, and is not affected by events subsequent to a purchase, including changes in characterization, value or rating of any specific mortgage-related assets or economic conditions or other events generally affecting any mortgage-related assets of the type that we hold.

Investment Policy

    Our investment policy provides guidelines for acquiring investments and contemplates that we will acquire a portfolio of investments that can be grouped into specific categories. Each category and our respective investment limitations are as follows:

    50% Category.  At least 50% of our total assets are expected to consist of (i) short-term investments, (ii) mortgage-backed securities that are either issued or guaranteed by an agency of the federal government, (iii) mortgage-backed securities that are rated AAA by at least one nationally recognized rating agency, or (iv) high-credit quality mortgage loans that are funded with committed secured borrowings.

    75% Category.  At least 75% of our total assets are expected to consist of investments that qualify for the 50% Category, or other mortgage-backed securities that have received an investment grade rating by at least one nationally recognized rating agency.

    90% Category.  At least 90% of our total assets are expected to consist of investments that qualify for the 75% Category, or high-credit quality mortgage loans that are not funded by committed secured borrowings.

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    10% Category.  Not more than 10% of our total assets are expected to consist of (i) mortgage-backed securities rated below investment grade, (ii) mortgage derivative securities, or (iii) other investments.

Leverage Policy

    We anticipate using leverage in an attempt to increase returns to our stockholders. Pursuant to our leverage policy, we seek to strike a balance between the under-utilization of leverage, which reduces potential returns to stockholders, and the over-utilization of leverage, which could reduce our ability to meet our obligations during adverse market conditions. As described below, we have established a leverage policy to control the type and amount of leverage used to fund the acquisition of our mortgage-related assets. Our leverage policy is intended to provide guidelines for using uncommitted and committed secured borrowings.

    Uncommitted Secured Borrowings.  A substantial portion of our borrowings may consist of uncommitted secured borrowings, including reverse repurchase agreements, lines of credit and other financing transactions. A reverse repurchase agreement is a borrowing device evidenced by an agreement to sell securities or other mortgage-related assets to a third-party and a simultaneous agreement to repurchase them at a specified future date and price, the price difference constituting interest on the borrowing. These funding sources generally do not commit the lender to continue to provide us with financing. We intend to limit the amount of uncommitted secured borrowings to 92% of our total assets, less any assets that are funded with committed secured borrowings, plus the market value of any related hedging transactions. If the amount of these borrowings exceeds 92%, the management company will be required to submit a plan to our board of directors designed to bring the total amount of uncommitted secured borrowings below the 92% limitation. We expect that in many circumstances this goal will be achieved over time without active management through the natural process of mortgage principal repayments and increases in the market value of our total assets. We anticipate that we will only enter into repurchase agreements and other financing transactions with counter-parties rated investment grade by a nationally recognized rating agency.

    Committed Secured Borrowings.  Our borrowings may also consist of committed secured borrowings, including the issuance of collateralized mortgaged obligations, structured commercial paper programs, secured term notes and other financing transactions. These funding sources generally commit the lender to provide financing to us for a specified period of time or for the funding of specific assets until they mature. We intend to limit the amount of committed secured borrowings to 97% of the assets funded with these borrowings at the time we enter into any corresponding transaction.

Interest Rate Risk Management Policy

    We have established an interest rate risk management policy designed to mitigate the negative impact of changing interest rates by targeting the difference between the market weighted average duration on our mortgage-related assets funded with secured borrowings and the market weighted average duration of these borrowings to one year or less, taking into account all hedging transactions. We generally do not intend to have any specific duration target for the portion of our mortgage-related assets that are not funded by secured borrowings. We may not, however, be able to limit these duration differences and there may be periods of time when the duration difference will be greater than one year.

    We may implement our interest rate risk management policy by using various hedging transactions, including interest rate swaps, interest rate caps, interest rate floors, financial futures contracts, options on financial futures contracts and other structured transactions. We do not intend to enter into these transactions for speculative purposes.

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REIT Compliance Policy

    We intend to continue to operate our business in compliance with the REIT provisions of the tax code. Accordingly, all of the provisions outlined in our investment, leverage and interest rate risk management policies are subordinate to the REIT provisions of the tax code if any conflicts arise. To qualify for tax treatment as a REIT, we must meet specific tests as fully described in sections 856 and 857 of the tax code. A summary of the requirements for qualification as a REIT are described below:

    Stock Ownership Tests.  Our capital stock must be held beneficially by at least 100 persons and no more than 50% of the value of our capital stock may be owned, directly or indirectly, by five or fewer individuals at all times during the last half of the taxable year. Tax-exempt entities, other than private foundations and some unemployment compensation trusts, are generally not treated as individuals for these purposes.

    Asset Tests.  We must generally meet the following asset tests at the close of each quarter of each taxable year. At least 75% of the value of our total assets must consist of qualified REIT real estate assets, United States government securities, cash and cash items. The value of our securities that are not taken into account for purposes of the 75% asset test must not exceed (i) 5% of the value of our total assets in the case of securities of any one non-government issuer, or (ii) 10% of the outstanding voting securities of any non-government issuer.

    Income Tests.  We must generally meet the following gross income tests for each taxable year. At least 75% of our gross income must be derived from specified real estate sources, including interest income and gain from the disposition of qualified REIT real estate assets or qualified temporary investment income. At least 95% of our gross income for each taxable year must be derived from sources of income qualifying for the 75% gross income test, dividends, interest unrelated to real estate and gains from the sale of stock or other securities, including some interest rate swap and cap agreements entered into to hedge variable rate debt incurred to acquire qualified REIT real estate assets, not held for sale in the ordinary course of business.

    Dividend Distribution Requirements.  We must generally distribute to our stockholders an amount equal to at least 90% of our taxable income before deductions of dividends paid and excluding net capital gains. We have until January 31 following the end of the fiscal year to pay out the dividends to stockholders and are permitted to offer a special dividend in order to meet the 90% requirement.

Other Policies

    We conduct our business in a manner intended to avoid regulation under the Investment Company Act. We do not currently intend to originate mortgage loans or offer securities in exchange for real property. We will not purchase any mortgage-related assets from our affiliates, other than mortgage securities that may be purchased from any taxable subsidiary that may be formed in connection with the securitization of mortgage loans.

    Our board of directors has established the policies and strategies discussed above, and has the power to modify or waive these policies and strategies, subject to approval by a majority of the unaffiliated directors. Our board of directors establishes and approves our policies and strategies at least annually, subject to approval by a majority of the unaffiliated directors.

Description of Our Investments

    We invest principally in the following types of mortgage-related assets, subject to the operating restrictions described in our operating policies above.

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Primary Mortgage Securities

    Pass-Through Certificates.  Pass-through certificates are securities representing interests in "pools" of mortgage loans secured by residential real property in which payments of both interest and principal on the securities are generally made monthly, in effect "passing through" monthly payments made by the individual borrowers on the mortgage loans which underlie the securities, net of fees paid to the issuer or guarantor of the securities. Early repayment of principal on some mortgage-related assets, arising from prepayments of principal due to sale of the underlying property, refinancing or foreclosure, net of fees and costs which may be incurred, may expose us to a lower rate of return upon reinvestment of principal. This is generally referred to as prepayment risk. Additionally, if a security subject to prepayment has been purchased at a premium, the value of the premium would be lost in the event of prepayment. Like other fixed-income securities, when interest rates rise, the value of a mortgage-related asset generally will decline.

    When interest rates are declining, however, the value of mortgage-related assets with prepayment features may not increase as much as other fixed-income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related asset and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of purchase. When interest rates rise, our holdings of mortgage-related assets may experience reduced returns if the owners of the underlying mortgages pay off their mortgages later than anticipated. This is generally referred to as extension risk.

    Payment of principal and interest on some mortgage pass-through securities, although not the market value of the securities themselves, may be guaranteed by the full faith and credit of the federal government, including the Governmental National Mortgage Association, or Ginnie Mae, or by agencies or instrumentalities of the federal government, including Fannie Mae and the Federal Home Loan Mortgage Corporation, or Freddie Mac. Mortgage-related assets created by non-governmental issuers, including commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers, may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities, private insurers or the mortgage poolers.

    Collateralized Mortgage Obligations.  Collateralized mortgage obligations, or CMOs, are hybrid mortgage-related instruments. Interest and pre-paid principal on a CMO are paid, in most cases, on a monthly basis. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae. CMOs are structured into multiple classes, with each class bearing a different stated maturity. Monthly payments of principal, including prepayments, are first returned to investors holding the shortest maturity class; investors holding the longer maturity classes receive principal only after the first class has been retired. We will consider CMOs that are issued or guaranteed by the federal government or by any of its agencies or instrumentalities to be United States government securities.

Other Mortgage Securities

    General.  In addition to pass-through certificates and CMOs, we may acquire other mortgage securities, including non high-quality mortgage-related assets and other mortgage securities collateralized by single-family mortgage loans, mortgage warehouse participations, mortgage derivative securities, subordinated interests and other mortgage-backed and mortgage-collateralized obligations.

    Mortgage Derivative Securities.  We may acquire mortgage derivative securities in an amount not to exceed 10% of our total assets. Mortgage derivative securities provide for the holder to receive interest only, principal only, or interest and principal in amounts that are disproportionate to those payable on the underlying mortgage loans. Payments on mortgage derivative securities are highly sensitive to the

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rate of prepayments on the underlying mortgage loans. In the event of faster or slower than anticipated prepayments on these mortgage loans, the rates of return on interests in mortgage derivative securities representing the right to receive interest only or a disproportionately large amount of interest, or interest only derivatives, would be likely to decline or increase, respectively. Conversely, the rates of return on mortgage derivative securities representing the right to receive principal only or a disproportionate amount of principal, or principal only derivatives, would be likely to increase or decrease in the event of faster or slower prepayments, respectively.

    We may also invest in inverse floaters, a class of CMOs with a coupon rate that resets in the opposite direction from the market rate of interest to which it is indexed, including the London Inter-Bank Offered Rate or the 11th District Cost of Funds Index. Any rise in the index rate, which can be caused by an increase in interest rates, causes a drop in the coupon rate of an inverse floater while any drop in the index rate causes an increase in the coupon of an inverse floater. An inverse floater may behave like a leveraged security since its interest rate usually varies by a magnitude much greater than the magnitude of the index rate of interest. The leverage-like characteristics inherent in inverse floaters are associated with greater volatility in their market prices.

    We may also invest in other mortgage derivative securities that may be developed in the future.

    Subordinated Interests.  We may also acquire subordinated interests, which are classes of mortgage securities that are junior to other classes of the same series of mortgage securities in the right to receive payments from the underlying mortgage loans. The subordination may be for all payment failures on the mortgage loans securing or underlying such series of mortgage securities. The subordination will not be limited to those resulting from particular types of risks, including those resulting from war, earthquake or flood, or the bankruptcy of a borrower. The subordination may be for the entire amount of the series of mortgage securities or may be limited in amount.

    Mortgage Warehouse Participations.  We may also occasionally acquire mortgage warehouse participations as an additional means of diversifying our sources of income. We anticipate that these investments, together with our investments in other mortgage-related assets, will not in the aggregate exceed 10% of our total mortgage-related assets. These investments are participations in lines of credit to mortgage loan originators that are secured by recently originated mortgage loans that are in the process of being sold to investors. Because they do not qualify as qualified REIT real estate assets under the tax code, our investments in mortgage warehouse participations are limited by the REIT provisions of the tax code.

Mortgage Loans

    General.  We may acquire and accumulate mortgage loans as part of our investment strategy until a sufficient quantity has been accumulated for securitization into high-quality mortgage securities in order to enhance their value and liquidity. We anticipate that the mortgage loans that we acquire and have not yet been securitized, together with our investments in other mortgage-related assets, will not constitute more than 25% of our total mortgage-related assets at any time. All mortgage loans will be acquired with the intention of securitizing them into high-credit quality mortgage securities. Despite our intentions, however, we may not be successful in securitizing these mortgage loans. To meet our investment criteria, the mortgage loans to be acquired by us will generally conform to the underwriting guidelines established by Fannie Mae, Freddie Mac or other credit insurers. Applicable banking laws generally require that an appraisal be obtained in connection with the original issuance of mortgage loans by the lending institution. We do not intend to obtain additional appraisals at the time of acquiring mortgage loans.

    The mortgage loans may be originated by or purchased from various suppliers of mortgage-related assets throughout the United States, including savings and loans associations, banks, mortgage bankers and other mortgage lenders. We may acquire mortgage loans directly from originators and from entities

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holding mortgage loans originated by others. Our board of directors has not established any limits upon the geographic concentration of mortgage loans that we may acquire or the credit quality of suppliers of the mortgage-related assets that we acquire.

    Conforming and Non-Conforming Mortgage Loans.  We may acquire both conforming and non-conforming loans for securitization. Conforming mortgage loans comply with the requirements for inclusion in a loan guarantee program sponsored by Fannie Mae, Freddie Mac or Ginnie Mae. Non-conforming mortgage loans are mortgage loans that do not qualify in one or more respects for purchase by Fannie Mae or Freddie Mac under their standard programs. We expect that a majority of non-conforming mortgage loans that we purchase will be non-conforming primarily because they have original principal balances which exceed the requirements for Freddie Mac or Fannie Mae programs.

    Commitments to Mortgage Loan Sellers.  We may issue commitments to originators and other sellers of mortgage loans who follow policies and procedures that generally comply with Fannie Mae and Freddie Mac regulations and guidelines and that comply with all applicable federal and state laws and regulations for mortgage loans secured by single-family residential properties. In addition, commitments may be issued for agency certificates as well as privately issued pass-through certificates and mortgage loans. Our commitments will obligate us to purchase mortgage-related 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 we may commit to acquire mortgage loans prior to funding, all mortgage loans are to be fully funded prior to our acquisition of them. Following the issuance of commitments, we will be exposed to risks of interest rate fluctuations similar to those risks on our adjustable-rate mortgage-related assets.

    Securitization of Mortgage Loans.  We may acquire and hold mortgage loans until a sufficient quantity has been accumulated for securitization. During the accumulation period, we will be subject to risks of borrower defaults and bankruptcies, fraud losses and special hazard losses, including those occurring from earthquakes or floods, that are not covered by standard hazard insurance. In the event of a default on any of our mortgage loans, we will bear the risk of loss of the 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. Our insurance may not adequately cover our losses. In addition, 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. Thus, completing the securitization for all our mortgage loans may not be possible or economical and, thus, we will continue to bear the risks of borrower defaults and special hazard losses.

    Protection Against Mortgage Loan Risks.  We anticipate that each mortgage loan purchased will have a commitment for mortgage pool insurance from a mortgage insurance company with a claims-paying ability in one of the two highest rating categories by either of the rating agencies. Mortgage pool insurance insures the payment of certain portions of the principal and interest on mortgage loans. In lieu of mortgage pool insurance, we may arrange for other forms of credit enhancement such as letters of credit, subordination of cash flows, corporate guaranties, establishment of reserve accounts or over-collateralization. We generally expect that when we acquire mortgage loans, the seller will generally represent and warrant to us that there has been no fraud or misrepresentation during the origination of the mortgage loans and agree to repurchase any mortgage loans with respect to which there was fraud or misrepresentation. We also generally expect that we will provide similar representations and warranties when we sell or pledge 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 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 we will generally have recourse to the seller based on the seller's representations and warranties to us, we will generally be at risk for loss to the extent the seller does not perform its repurchase obligations.

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Other Investments

    We may acquire other investments that include (i) equity and debt securities issued by other primarily mortgage-related finance companies, (ii) interests in mortgage-related collateralized bond obligations, (iii) other subordinated interests in pools of mortgage-related assets, (iv) commercial mortgage loans and securities, and (v) residential mortgage loans other than high-credit quality mortgage loans. Although we expect that our other investments will be limited to less than 10% of total assets, we have no limit on how much of our stockholders' equity will be allocated to other investments. There may be periods in which other investments represent a large portion of our stockholders' equity.

Legal Proceedings

    From time to time, The TCW Group, Inc. is involved in litigation in connection with its operations, including litigation involving the operations of the mortgage-backed securities group. We believe that there are no current legal proceedings involving The TCW Group, Inc. or the mortgage-backed securities group that would materially harm the management company's or our executive officers' ability to manage us. Currently, there are no legal proceedings against us.

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DESCRIPTION OF SECURITIES

    The description of our capital stock set forth below does not purport to be complete and is qualified in its entirety by reference to our charter, as amended and restated, and our bylaws, copies of which are exhibits to the registration statement of which this prospectus is a part.

General

    Under our charter, the total number of shares of all classes of stock that we have authority to issue is 150,000,000 consisting of 100,000,000 shares of common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. As of September 30, 2001, there were 5,753,000 shares of our common stock and no shares of our preferred stock outstanding. In addition, in October 2001, we issued 6,095,000 shares of our common stock in a registered public offering, increasing the total number of shares outstanding at the date of this prospectus to 11,848,000.

Our Common Stock

    Subject to any preferential rights of any outstanding class of our preferred stock and to the provisions of our charter regarding the restrictions on the transfer of stock, the holders of our common stock are entitled to distributions as our board of directors may declare from time to time from funds legally available for this purpose and, upon liquidation, are entitled to receive pro rata all of our assets available for distributions to holders after payment of or adequate provision for all our known debts and liabilities. All shares of our common stock issued in connection with this prospectus will be duly authorized, fully paid and non-assessable, and the holders of these shares will not have preemptive rights.

    Subject to the provisions of our charter regarding the restrictions on transfer of stock, the holders of our outstanding common stock are entitled to one vote per share on all matters voted on by our common stockholders, including elections of directors. Our common stockholders exclusively possess all voting power, except as otherwise required by law or as provided in any resolution adopted by our board of directors with respect to any class of our preferred stock establishing the powers, designations, preferences and relative, participating, option or other special rights of the series. Our charter does not provide for cumulative voting in the election of directors.

    Our charter provides for a staggered board of directors consisting of three classes of directors as nearly equal in number as practicable. Each class holds office until the third annual meeting of stockholders following the annual meeting of stockholders at which such class of directors was elected. The provisions relating to the staggered board may be amended only upon the vote of the holders of at least two-thirds of the capital stock entitled to vote for the election of directors.

    Pursuant to the Maryland General Corporation Law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter, is set forth in the corporation's charter. Our charter does not provide for a lesser percentage in any of these situations except for charter amendments, which may be approved by a majority of our stockholders. Most amendments to our charter require approval by our stockholders by an affirmative vote of a majority of all votes entitled to be cast.

Investors

    The approximate number of record holders of our common stock as of the date of this prospectus is 65.

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Transfer Agent and Registrar

    The Bank of New York is the transfer agent and registrar for our common stock.

Our Preferred Stock

    We may issue shares of our preferred stock from time to time, in one or more classes, as authorized by our charter and our board of directors. To date, our board of directors has authorized only one series of preferred stock in connection with our shareholder rights agreement. Prior to issuance of shares of each class, our board of directors is required by the Maryland General Corporation Law and our charter to fix for each class, subject to the provisions of our charter regarding the restrictions on transfer of stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption, as are permitted by Maryland law. Our preferred stock will, when issued, be duly authorized, fully paid and non-assessable. Our board of directors could authorize the issuance of shares of our preferred stock with terms and conditions that could have the effect of discouraging a takeover or other transactions that our common stockholders might believe to be in their best interests or in which holders of some, or a majority, of the shares of our common stock might receive a premium for their shares over the then market price of shares of our common stock. Any preferred stock we issue from time to time may rank senior to our common stock as to dividends and may rank senior to our common stock as to distributions in the event of our liquidation, dissolution or winding up. The ability of our board of directors to issue preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting powers of our common stockholders.

Ownership Restrictions

    Two of the requirements that must be met in order for us to qualify for the tax benefits accorded by the REIT provisions of the tax code are that:

•

during the last half of each taxable year not more than 50% in value of the outstanding shares may be owned directly or indirectly by five or fewer individuals, i.e., the "5/50 Rule"; and



•

our shares of stock must be beneficially owned by 100 or more persons for at least 335 days of each taxable year of 12 months or a proportionately smaller number of days for a shorter period, also known as the "100 Stockholder Rule."

    In order that we may meet these requirements at all times, our charter prohibits any person from acquiring or holding, directly or indirectly, shares of our 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 our common stock or in excess of 9.8% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our preferred stock.

    For purposes of the 5/50 Rule, the constructive ownership provisions applicable under Section 544 of the tax code attribute ownership of securities owned by a corporation, partnership, estate or trust proportionately to its stockholders, partners or beneficiaries, attribute ownership of securities owned by family members and partners to other members of the same family, treat securities with respect to which a person has an option to purchase as actually owned by that person, and set forth application of these attribution provisions with respect to our common stock that is constructively owned by virtue of such provisions, i.e., "reattribution." Thus, for purposes of determining whether a person holds shares of our common stock in violation of the ownership limitations set forth in our charter, many types of entities may own directly more than the 9.8% limit because these entities' shares are attributed to their individual stockholders. On the other hand, a person will be treated as owning not only shares of common stock actually or beneficially owned, but also any shares of common stock attributed to the

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person under the attribution rules described above. Accordingly, under some circumstances, shares of our 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 our charter. Ownership of shares of our common stock through attribution is generally referred to as constructive ownership. The 100 Stockholder Rule, referred to above, is determined by actual, and not constructive, ownership.

    Our charter further provides that if any transfer of shares of our common stock which, if effective, would result in any person beneficially or constructively owning shares of our common stock in excess or in violation of the above transfer or ownership limitations, then that number of shares of our common stock the beneficial or constructive ownership of which otherwise would cause the person to violate the limitations, rounded to the nearest whole share, shall be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the intended transferee shall not acquire any rights in the shares. Shares of our common stock held by a trustee shall be issued and outstanding shares of common stock. The intended transferee shall not benefit economically from ownership of any shares held in 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 of the trust 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 our discovery that shares of our common stock have been transferred to the trustee shall be paid by the recipient of such dividend or distribution to the trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the trustee. Our board of directors may, in its discretion, waive these requirements on owning shares in excess of the ownership limitations, so long as the waiver does not cause us to fail to qualify as a REIT.

    Within 20 days of receiving notice from us that shares of our common stock have been transferred to the trust, the trustee shall sell the shares held in the trust to a person, designated by the trustee, whose ownership of the shares will not violate the ownership limitations set forth in the charter. Upon the 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:

•

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, i.e., in the case of a gift, devise or other similar transaction, the market price, as explained further below, of the shares on the day of the event causing the shares to be held in the trust; and



•

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 our common stock transferred to the trustee shall be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in the transfer of the shares to the trust, or, in the case of a devise or gift, the market price at the time of the devise or gift, and (ii) the market price on the date we, or our designee, accept the offer. We shall have the right to accept the offer for a period of 90 days after the later of (x) the date of the event that resulted in the shares being transferred to the trust, and (y) the date we determine in good faith that an event has occurred that resulted in the shares being transferred to the trust if we did not previously receive notice of such event as required by our charter. Upon the sale to us, 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.

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    The term "market price" on any date shall mean, with respect to any class or series of outstanding shares of our stock, the closing price for the shares on that date. The "closing price" on any date shall mean the last sale price for the shares, regular way, or, in case no sale takes place on that day, the average of the closing bid and asked prices, regular way, for the shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the American Stock Exchange or, if the shares are not listed or admitted to trading on the American Stock Exchange, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares are listed or admitted to trading or, if the 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 the system is no longer in use, the principal other automated quotation system that may then be in use or, if the shares are not quoted by that organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares selected by our board of directors or, in the event that no trading price is available for the shares, the fair market value of the shares, as determined in good faith by our board of directors.

    We are required to send stockholder demand letters to some of our stockholders of record within 30 days of the end of each taxable year. These stockholder demand letters must be sent to all record owners of:

•

5% or more of our stock, if we have 2,000 or more stockholders of record;



•

1% or more of our stock, if we have more than 200 but less than 2,000 stockholders of record; or



•

0.5% or more of our stock, if we have 200 or fewer stockholders of record.

    In response to the stockholder demand letters, the stockholders of record are required to provide certain information to us enabling us to determine the actual (direct and indirect) ownership of our stock. Each direct or indirect owner shall provide us with additional information as we may reasonably request in order to determine the effect, if any, of his ownership on our status as a REIT and to ensure compliance with the ownership limitations.

    Our charter's ownership limit will not be automatically removed even if the REIT provisions of the tax code are changed so as to remove any ownership concentration limitation. Any change of the ownership limit would require an amendment to the charter. An amendment requires the affirmative vote of holders holding at least two-thirds of the outstanding shares entitled to vote on the matter.

    All certificates representing shares of our common or preferred stock will bear a legend referring to the restrictions described above.

Limitations on Changes in Control

General

    The provisions of our charter and bylaws providing for ownership limitations, a staggered board of directors and the authorization of our board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change in control of or the removal of existing management, and as a result could prevent our stockholders from being paid a premium over the then-prevailing market price for their shares of our common stock.

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Shareholder Rights Agreement

    We have adopted a shareholder rights agreement to enable our stockholders to receive fair and equal treatment in the event of any proposed acquisition of us, among other things. Our shareholder rights agreement may have the effect of delaying, deferring or preventing a change in control of and, therefore, could adversely affect our stockholders' ability to realize a premium over the then-prevailing market price for our common stock in connection with a change in control transaction. A fuller description of our shareholder rights agreement can be found in our Current Report on Form 8-K filed with the SEC on July 27, 1999, which includes the shareholder rights agreement as an exhibit.

    In connection with the adoption of the shareholder rights agreement, our board of directors declared a dividend distribution of one preferred stock purchase right for each outstanding share of our common stock to stockholders of record as of the close of business on July 30, 1999. Each preferred stock purchase right entitles the registered holder of this right to purchase from us one one-hundredth of a share of our Series A Junior Participating Preferred Stock, par value $0.01 per share at a cash exercise price of $50.00, subject to adjustment.

    The preferred stock purchase rights are currently not exercisable and are attached to and trade with all shares of our common stock outstanding as of, and issued subsequent to, the July 30, 1999 record date. The preferred stock purchase rights will separate from our common stock and will become exercisable upon the earlier of:

•

ten business days following a public announcement that a person or group of affiliated or associated persons, an "acquiring person", has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of our common stock, other than as a result of repurchases of stock by us or inadvertent actions by institutional or other stockholders; or



•

ten business days, or a later date as our board of directors shall determine, following the commencement of a tender offer or exchange offer that would result in a person or group becoming an "acquiring person," as described above.

    The preferred stock purchase rights will expire at 5:00 P.M. (Eastern Standard Time) on July 30, 2009, unless we redeem or exchange these rights before this date.

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MATERIAL CHANGES

Equity Offering, Investment of Proceeds and Hedging Arrangements

    In October 2001, we issued 6,095,000 shares of our common stock in a registered public offering, raising net proceeds of approximately $57 million after underwriting discounts, commissions and other estimated expenses. We invested the net proceeds primarily in agency guaranteed fixed-rate mortgage-backed securities, consistent with our investment policy. Our portfolio of mortgage-backed securities was approximately $1.2 billion at October 31, 2001, compared to $516 million at September 30, 2001. Consistent with our leverage policy, our debt-to-equity ratio at October 31, 2001 was approximately 10.5, compared to approximately 9.2 at September 30, 2001.

    Since September 30, 2001, we have entered into interest rate swap agreements with a notional amount of $550 million and maturities ranging from 2.5 years to 10.0 years, matching the effective duration of our mortgage-related assets. Under these swap agreements, we pay each month a fixed weighted-average annual interest rate of 3.78% and receive a variable interest rate equivalent to the one-month London Inter-Bank Offered Rate.

The Relationship Among The TCW Group, Inc. and Société Générale, S.A.

    On April 11, 2001, The TCW Group, Inc. and certain of its stockholders and Société Générale, S.A., Société Générale Asset Management, S.A., or SGAM, a wholly-owned subsidiary of Société Générale, and certain other parties entered into an acquisition agreement and plan of reorganization pursuant to which SGAM agreed to acquire a 70% interest in The TCW Group, Inc. over the next five years. The first step in the acquisition closed on July 6, 2001 and as a result of this transaction, Société Générale controls The TCW Group, Inc. and the management company.

    The acquisition agreement provides, in pertinent part, for SGAM to acquire the 70% interest in The TCW Group, Inc. with payment in Société Générale shares. Under the terms of the acquisition agreement, the transaction will be completed in two main stages. In the first stage, SGAM acquired on July 6, 2001 a 51% ownership stake in The TCW Group, Inc. SGAM holds a separate class of common stock of The TCW Group, Inc. that has additional voting rights, giving SGAM approximately 80% of the total voting rights in The TCW Group, Inc. In the second stage, between 2003 and 2006, SGAM has the right to acquire, and The TCW Group, Inc. shareholders have the right to put to SGAM, an additional 19% of The TCW Group, Inc. shares. The remaining 30% of the shares of The TCW Group, Inc. will be retained by current shareholders and will be available for re-circulation to employees for incentive purposes as Société Générale repurchases them over time.

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FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes particular United States federal income tax considerations regarding our qualification and taxation as a REIT and particular United States federal income tax consequences resulting from the acquisition, ownership and disposition of our common stock. This discussion is based on current law and assumes that we have qualified at all times throughout our existence, and will continue to qualify, as a REIT for United States federal income tax purposes. The following discussion is not exhaustive of all possible tax considerations. This summary neither gives a detailed discussion of any state, local or foreign tax considerations nor discusses all of the aspects of United States federal income taxation that may be relevant to you in light of your particular circumstances or to particular types of stockholders, including insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations or partnerships, and persons who are not citizens or residents of the United States, subject to special treatment under the United States federal income tax laws. This discussion assumes that you will hold our common stock as a "capital asset," generally property held for investment, under the tax code.

You are urged to consult with your own tax advisor regarding the specific consequences to you of the purchase, ownership and sale of stock in an entity electing to be taxed as a REIT, including the federal, state, local, foreign and other tax considerations of such purchase, ownership, sale and election and the potential changes in applicable tax laws.

General

    Our qualification and taxation as a REIT depends upon our ability to continue to meet the various qualification tests imposed under the tax code and discussed below relating to our actual annual operating results, asset diversification, distribution levels and diversity of stock ownership. Accordingly, the actual results of our operations for any particular taxable year may not satisfy these requirements. Further, the anticipated income tax treatment described in this prospectus may be changed, perhaps retroactively, by legislative, administrative or judicial action at any time.

    We have made an election to be taxed as a REIT under the tax code commencing with our taxable year ended December 31, 1997. We currently expect to continue operating in a manner that will permit us to maintain our qualification as a REIT. All qualification requirements for maintaining our REIT status, however, may not have been or will not continue to be met.

    So long as we qualify for taxation as a REIT, we generally will not be required to pay federal corporate income taxes on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the "double taxation" that ordinarily results from investment in a corporation. Double taxation means taxation once at the corporate level when income is earned and once again at the stockholder level when this income is distributed. We will be required to pay federal income tax, however, as follows:

•

we will be required to pay tax at regular corporate rates on any undistributed "real estate investment trust taxable income," including undistributed net capital gains;



•

we may be required to pay the "alternative minimum tax" on our items of tax preference;



•

if we have (a) net income from the sale or other disposition of "foreclosure property" which is held primarily for sale to customers in the ordinary course of business, or (b) other nonqualifying income from foreclosure property, we will be required to pay tax at the highest corporate rate on this income. Foreclosure property is generally defined as property acquired through foreclosure or after a default on a loan secured by the property or a lease of the property.

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    We will be required to pay a 100% tax on any net income from prohibited transactions. Prohibited transactions are, in general, sales or other taxable dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business depends on all the facts and circumstances surrounding the particular transaction.

    If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our qualification as a REIT because certain other requirements are met, we will be subject to a tax equal to:

•

the greater of (i) the amount by which 75% of our gross income exceeds the amount qualifying under the 75% gross income test described below, and (ii) the amount by which 90% of our gross income exceeds the amount qualifying under the 95% gross income test described below, multiplied by



•

a fraction intended to reflect our profitability.

    We will be required to pay a 4% excise tax on the excess of the required distribution over the amounts actually distributed if we fail to distribute during each calendar year at least the sum of:

•

85% of our real estate investment trust ordinary income for the year;



•

95% of our real estate investment trust capital gain net income for the year; and



•

any undistributed taxable income from prior periods.

    If we acquire any asset from a corporation which is or has been taxed as a C corporation under the tax code in a transaction in which the basis of the asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and we subsequently recognize gain on the disposition of the asset during the ten-year period beginning on the date on which we acquired the asset, then we will be required to pay tax at the highest regular corporate tax rate on this gain to the extent of the excess of:

•

the fair market value of the asset, over



•

our adjusted basis in the asset, in each case determined as of the date on which we acquired the asset. A C corporation is generally defined as a corporation required to pay full corporate-level tax. The results described in this paragraph with respect to the recognition of gain assume that we will make an election under IRS Notice 88-19 or Treasury Regulation Section 1.337(d)-5T.

Requirements for Qualification as a REIT

    The tax code defines a REIT as a corporation, trust or association:

•

that is managed by one or more trustees or directors;



•

that issues transferable shares or transferable certificates to evidence beneficial ownership;



•

that would be taxable as a domestic corporation but for tax code Sections 856 through 860;



•

that is not a financial institution or an insurance company within the meaning of the tax code;



•

that is beneficially owned by 100 or more persons;



•

not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals, including specified entities, during the last half of each taxable year; and



•

that meets other tests, described below, regarding the nature of its income and assets and the amount of its distributions.

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    The tax code provides that all of the first four conditions stated above must be met during the entire taxable year and that the fifth condition must be met during at least 335 days of a taxable year of twelve months, or during a proportionate part of a taxable year of less than twelve months. The fifth and sixth conditions do not apply until after the first taxable year for which an election is made to be taxed as a REIT.

    For purposes of the sixth condition, pension funds and other specified tax-exempt entities generally are treated as individuals, except that a "look-through" exception applies with respect to pension funds.

Stock Ownership Tests

    Our stock must be beneficially held by at least 100 persons, the "100 Stockholder Rule," and no more than 50% of the value of our stock may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of the taxable year, the "5/50 Rule." For purposes of the 100 Stockholder Rule only, most tax-exempt entities, including employee benefit trusts and charitable trusts, but excluding trusts described in Section 401(a) of the tax code and exempt under Section 501(a) of the tax code, are generally treated as individuals for these purposes. These stock ownership requirements must be satisfied in each taxable year other than the first taxable year for which an election is made to be taxed as a REIT. We are required to solicit information from certain of our record stockholders to verify actual stock ownership levels, and our charter provides for restrictions regarding the transfer of our stock in order to aid in meeting the stock ownership requirements. If we were to fail either of the stock ownership tests, we would generally be disqualified from REIT status, unless, in the case of the 5/50 Rule requirement, the "good faith" exemption under the tax code was available.

Income Tests

    We must satisfy two gross income requirements annually to maintain our qualification as a REIT:

•

We must derive directly or indirectly at least 75% of our gross income, excluding gross income from prohibited transactions, from specified real estate sources, including rental income, interest on obligations secured by mortgages on real property or on interests in real property, gain from the disposition of "qualified real estate assets," i.e., interests in real property, mortgages secured by real property or interests in real property, and some other assets, and income from certain types of temporary investments, the 75% gross income test; and



•

We must derive at least 95% of our gross income, excluding gross income from prohibited transactions, from (a) the sources of income that satisfy the 75% gross income test, (b) dividends, interest and gain from the sale or disposition of stock or securities, including some interest rate swap and cap agreements, options, futures and forward contracts entered into to hedge variable rate debt incurred to acquire qualified real estate assets, or (c) any combination of the foregoing.

    For purposes of the 75% and 95% gross income tests, a REIT is deemed to have earned a proportionate share of the income earned by any partnership, or any limited liability company treated as a partnership for federal income tax purposes, in which it owns an interest, which share is determined by reference to its capital interest in such entity, and is deemed to have earned the income earned by any qualified REIT subsidiary.

    Interest earned by a REIT does not qualify as income meeting the 75% or 95% gross income tests if the determination of all or some of the amount of interest depends in any way on the income or profits of any person. Interest will not be disqualified from meeting such tests, however, solely by reason of being based on a fixed percentage or percentages of receipts or sales.

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    If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are entitled to relief under the tax code. Generally, we may avail ourselves to the relief provisions if:

•

our failure to meet these tests was due to reasonable cause and not due to willful neglect;



•

we attach a schedule of the sources of our income to our federal income tax return; and



•

any incorrect information on the schedule was not due to fraud with intent to evade tax.

    We may not, however, be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions do not apply to a particular set of circumstances, we will not qualify as a REIT.

Asset Tests

    At the close of each quarter of our taxable year, we must satisfy four tests relating to the nature and diversification of its assets:

•

at least 75% of the value of our total assets must be represented by qualified real estate assets, including mortgage loans, cash, cash items and government securities;



•

not more than 25% of our total assets may be represented by securities, other than those securities included in the 75% asset test;



•

of the investments included in the 25% asset class, the value of any one issuer's securities may not exceed 5% of the value of our total assets, and we may not own more than 10% by vote or value of any one issuer's outstanding securities, in each case except with respect to stock of any "taxable REIT subsidiaries"; and



•

the value of the securities we own in any taxable REIT subsidiaries may not exceed 20% of the value of its total assets.

    For these purposes, we will be deemed to own a proportionate share of the assets of any partnership, or any limited liability company treated as a partnership for federal income tax purposes, in which we own an interest, which share is determined by reference to our capital interest in the entity, and will be deemed to own the assets owned by any qualified REIT subsidiary.

    After initially meeting the asset tests at the close of any quarter, we will not lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If we fail to satisfy the asset tests because we acquire securities or other property during a quarter, we can cure this failure by disposing of sufficient nonqualifying assets within 30 days after the close of that quarter. For this purpose, an increase in our interests in any partnership or limited liability company in which we own an interest will be treated as an acquisition of a portion of the securities or other property owned by that partnership or limited liability company.

Annual Distribution Requirements

    To maintain our qualification as a REIT, we are required to distribute dividends, other than capital gain dividends, to our stockholders in an amount at least equal to the sum of:

•

90% of our "REIT taxable income," and



•

90% of our after tax net income, if any, from foreclosure property, minus



•

the excess of the sum of specified items of our noncash income items over 5% of "REIT taxable income," as described below.

    Our "REIT taxable income" is computed without regard to the dividends paid deduction and net capital gain. In addition, for purposes of this test, non-cash income means income attributable to

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leveled stepped rents, original issue discount on purchase money debt, or a like-kind exchange that is later determined to be taxable. In addition, if we dispose of any asset we acquired from a corporation which is or has been a C corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of that C corporation, we would be required to distribute at least 90% of the after-tax gain, if any, we recognize on a disposition of the asset within the ten-year period following our acquisition of such asset, to the extent that such gain does not exceed the excess of:

•

the fair market value of the asset on the date we acquired the asset, over



•

our adjusted basis in the asset on the date we acquired the asset.

    We must make these distributions in the taxable year to which they relate, or in the following taxable year if they are declared before we timely file our tax return for that year and paid on or before the first regular dividend payment following the declaration.

    Dividends distributed by us must not be preferential. To avoid being preferential, every stockholder of the class of stock to which a distribution is made must be treated the same as every other stockholder of that class, and no class of stock may be treated other than according to its dividend rights as a class. To the extent that we do not distribute all of our net capital gain, or distribute at least 90%, but less than 100%, of our "REIT taxable income," as adjusted, we will be required to pay tax on this income at regular ordinary and capital gain corporate tax rates.

Failure to Qualify as a REIT

    If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions of the tax code do not apply, we will be required to pay tax, including any alternative minimum tax, on our taxable income at regular corporate rates. Distributions to stockholders in any year in which we fail to qualify as a REIT will not be deductible by us and we will not be required to distribute any amounts to our stockholders. As a result, we anticipate that our failure to qualify as a REIT would reduce the cash available for distribution to our stockholders. In addition, if we fail to qualify as a REIT, all distributions to stockholders will be taxable at ordinary income rates to the extent of our current and accumulated earnings and profits. In this event, corporate distributees may be eligible for the dividends-received deduction. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year in which we lose our qualification.

Taxation of Taxable United States Stockholders

Distributions Generally

    Distributions out of our current or accumulated earnings and profits, other than capital gain dividends, will be taxable to United States stockholders as ordinary income. Provided that we continue to qualify as a REIT, dividends paid by us will not be eligible for the dividends received deduction generally available to United States stockholders that are corporations. To the extent that we make distributions in excess of current and accumulated earnings and profits, the distributions will be treated as a tax-free return of capital to each United States stockholder, and will reduce the adjusted tax basis which each United States stockholder has in our stock by the amount of the distribution, but not below zero. Distributions in excess of a United States stockholder's adjusted tax basis in its stock will be taxable as capital gain, and will be taxable as long-term capital gain if the stock has been held for more than one year. If we declare a dividend in October, November, or December of any calendar year which is payable to stockholders of record on a specified date in that month and actually pay the dividend during January of the following calendar year, the dividend is deemed to be paid by us and

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received by the stockholder on December 31st of the previous year. Stockholders may not include in their own income tax returns any of our net operating losses or capital losses.

    For purposes of the discussion in this prospectus, the term "United States stockholder" means a holder of our stock that is, for United States federal income tax purposes:

•

a citizen or resident of the United States;



•

a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any state thereof or in the District of Columbia, unless Treasury regulations provide otherwise;



•

an estate the income of which is subject to United States federal income taxation regardless of its source; or



•

a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust.

Capital Gain Distributions

    Distributions designated by us as net capital gain dividends will be taxable to United States stockholders as capital gain income. This capital gain income will be taxable to non-corporate United States stockholders at a 20% or 25% rate based on the characteristics of the asset we sold that produced the gain. United States stockholders that are corporations may be required to treat up to 20% of certain capital gain dividends as ordinary income.

Retention of Net Capital Gains

    We may elect to retain, rather than distribute as a capital gain dividend, our net capital gains. If we were to make this election, we would pay tax on such retained capital gains. In such a case, our stockholders would generally:

•

include their proportionate share of our undistributed net capital gains in their taxable income;



•

receive a credit for their proportionate share of the tax paid by us in respect of our net capital gain; and



•

increase the adjusted basis of their stock by the difference between the amount of their share of the our net capital gain and their share of the tax paid by us.

Passive Activity Losses and Investment Interest Limitations

    Distributions we make and gains arising from the sale or exchange of our stock by a United States stockholder will not be treated as passive activity income. As a result, United States stockholders will not be able to apply any "passive losses" against income or gains relating to our stock. Distributions by us, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation under the tax code.

Dispositions of Stock

    A United States stockholder that sells or disposes of our stock will recognize gain or loss for federal income tax purposes in an amount equal to the difference between the amount of cash or the fair market value of any property the stockholder receives on the sale or other disposition and the stockholder's adjusted tax basis in the stock. This gain or loss will be capital gain or loss if the stockholder has held the stock as a capital asset, and will be long-term capital gain or loss if the stockholder has held the stock for more than one year. In general, any loss recognized by a United

57

States stockholder upon the sale or other disposition of our stock that the stockholder has held for six months or less will be treated as long-term capital loss to the extent the stockholder received distributions from us which were required to be treated as long-term capital gains.

Information Reporting and Backup Withholding

    We report to our United States stockholders and the IRS the amount of dividends paid during each calendar year, and the amount of any tax withheld. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to dividends paid unless the holder is a corporation or comes within other exempt categories and, when required, demonstrates this fact, or provides a taxpayer identification number or social security number, certifying as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A United States stockholder that does not provide us with its correct taxpayer identification number or social security number may also be subject to penalties imposed by the IRS. A United States stockholder can meet this requirement by providing us with a properly completed and executed copy of IRS Form W-9 or a substantially similar form. Backup withholding is not an additional tax. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status.

    The Economic Growth and Tax Relief Reconciliation Act of 2001, signed into law on June 7, 2001, will reduce the backup withholding tax rate from 31% to 30.5% for amounts distributed after August 6, 2001. The backup withholding tax rate will then be gradually reduced each year until 2006, when the backup-withholding rate will be 28%.

Taxation of Tax-Exempt Stockholders

    The IRS has ruled that amounts distributed as a dividend by a REIT will be treated as a dividend by the recipient and excluded from the calculation of UBTI when received by a tax-exempt entity. Based on that ruling, provided that a tax-exempt stockholder has not held our stock as "debt financed property" within the meaning of the tax code, i.e., property the acquisition or holding of which is financed through a borrowing by the tax-exempt United States stockholder, the stock is not otherwise used in an unrelated trade or business, and we do not hold a residual interest in a real estate mortgage investment conduit, REMIC, that gives rise to "excess inclusion" income, as defined in Section 860E of the tax code, dividend income on our stock and income from the sale of our stock should not be UBTI to a tax-exempt stockholder. However, if we were to hold residual interests in a REMIC, or if a pool of its assets were to be treated as a "taxable mortgage pool," a portion of the dividends paid to a tax-exempt stockholder may be subject to tax as UBTI. Although we do not believe that we, or any portion of our assets, will be treated as a taxable mortgage pool, no assurance can be given that the IRS might not successfully maintain that such a taxable mortgage pool exists.

    For tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the tax code, respectively, income from an investment in our stock will constitute UBTI unless the organization is able to properly claim a deduction for amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment in our stock. Any prospective investors should consult their tax advisors concerning these "set aside" and reserve requirements.

    Notwithstanding the above, however, a portion of the dividends paid by a "pension-held REIT" may be treated as UBTI as to any pension trust which:

•

is described in Section 401(a) of the tax code; and

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•

holds more than 10%, by value, of the interests in the REIT.

    Tax-exempt pension funds that are described in Section 401(a) of the tax code are referred to below as "qualified trusts."

    A REIT is a "pension-held REIT" if:

•

it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the tax code provides that stock owned by a qualified trust shall be treated, for purposes of the 100 Stockholder Rule, described above, as owned by the beneficiaries of the trust, rather than by the trust itself; and



•

either at least one qualified trust holds more than 25%, by value, of the interests in the REIT, or one or more qualified trusts, each of which owns more than 10%, by value, of the interests in the REIT, holds in the aggregate more than 50%, by value, of the interests in the REIT.

    The percentage of any REIT dividend treated as UBTI is equal to the ratio of:

•

the UBTI earned by the REIT, treating the REIT as if it were a qualified trust and therefore subject to tax on UBTI, to



•

the total gross income of the REIT.

    A de minimis exception applies where the percentage is less than 5% for any year. As a result of the limitations on the transfer and ownership of stock contained in our charter, we do not expect to be classified as a "pension-held REIT."

Taxation of Non-United States Stockholders

    The rules governing federal income taxation of "non- United States stockholders" are complex and no attempt will be made herein to provide more than a summary of these rules. "Non- United States stockholders" mean beneficial owners of shares of our stock that are not United States stockholders.

    PROSPECTIVE NON-UNITED STATES STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS TO DETERMINE THE IMPACT OF FOREIGN, FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN OUR STOCK AND OF OUR ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING ANY REPORTING REQUIREMENTS.

    Distributions to non-United States stockholders that are not attributable to gain from our sale or exchange of United States real property interests and that are not designated by us 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 our current or accumulated earnings and profits. These distributions will generally be subject to a withholding tax equal to 30% of the distribution unless an applicable tax treaty reduces or eliminates that tax. However, if income from an investment in our stock is treated as effectively connected with the non-United States stockholder's conduct of a United States trade or business, the non-United States stockholder generally will be subject to federal income tax at graduated rates in the same manner as United States stockholders are taxed with respect to those distributions, and also may be subject to the 30% branch profits tax in the case of a non-United States stockholder that is a corporation. We expect to withhold tax at the rate of 30% on the gross amount of any distributions made to a non-United States stockholder unless:

•

a lower treaty rate applies and any required form, for example IRS Form W-8BEN, evidencing eligibility for that reduced rate is filed by the non-United States stockholder with us; or



•

the non-United States stockholder files an IRS Form W-8ECI with us claiming that the distribution is effectively connected income.

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    Any portion of the dividends paid to non-United States stockholders that is treated as excess inclusion income from a REMIC will not be eligible for exemption from the 30% withholding tax or a reduced treaty rate.

    Distributions in excess of our current and accumulated earnings and profits will not be taxable to non-United States stockholders to the extent that these distributions do not exceed the adjusted basis of the stockholder's stock, but rather will reduce the adjusted basis of that stock. To the extent that distributions in excess of current and accumulated earnings and profits exceed the adjusted basis of a non-United States stockholder's stock, these distributions will give rise to tax liability if the non-United States stockholder would otherwise be subject to tax on any gain from the sale or disposition of its stock, as described below. Because it generally cannot be determined at the time a distribution is made whether or not such distribution may 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 the distribution is subsequently determined to be in excess of our current and accumulated earnings and profits. We are also required to withhold 10% of any distribution in excess of our current accumulated earnings and profits if our stock is not a United States real property interest because we are a domestically controlled REIT, as discussed below. Consequently, although we intend to withhold at a rate of 30% on the entire amount of any distribution, to the extent that we do not do so, any portion of a distribution not subject to withholding at a rate of 30% may be subject to withholding at a rate of 10%.

    For any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or exchange of a United States real property interest, which includes some interests in real property, but generally does not include mortgage loans or mortgage-backed securities, will be taxed to a non-United States stockholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA. Under FIRPTA, distributions attributable to gain from sales of United States real property interests are taxed to a non-United States stockholder as if that gain were effectively connected with the stockholder's conduct of a United States trade or business. Non-United States stockholders thus would be taxed at the normal capital gain rates applicable to 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-United States corporate stockholder. We are required to withhold 35% of any distribution that we designate as a United States real property capital gains dividend. The amount withheld is creditable against the non-United States stockholder's FIRPTA tax liability.

    Gains recognized by a non-United States stockholder upon a sale of our stock generally will not be taxed under FIRPTA if we are a domestically controlled REIT, which is 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-United States stockholders. Because our stock is publicly traded, we cannot assure our investors that we are or will remain a domestically controlled REIT. Alternatively, a non-United States stockholder that owns, actually or constructively, 5% or less of our stock throughout a specified testing period will not recognize taxable gain on the sale of our stock under FIRPTA if the shares are traded on an established securities market.

    Gains not subject to FIRPTA will be taxable to a non-United States stockholder if:

•

the non-United States stockholder's investment in the stock is effectively connected with a trade or business in the United States, in which case the non-United States stockholder will be subject to the same treatment as United States stockholders with respect to that gain; or



•

the non-United States stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and other conditions are met, in which case the nonresident alien individual will be subject to a 20% or 25% tax on the individual's capital gains.

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    If gain from the sale of the stock were subject to taxation under FIRPTA, the non-United States stockholder would be subject to the same treatment as United States stockholders with respect to that 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-United States corporations.

State, Local and Foreign Taxation

    We may be required to pay state, local and foreign taxes in various state, local and foreign jurisdictions, including those in which we transact business or makes investments, and our stockholders may be required to pay state, local and foreign taxes in various state, local and foreign jurisdictions, including those in which they reside. Our state, local and foreign tax treatment may not conform to the federal income tax consequences summarized above. In addition, a stockholder's state, local and foreign tax treatment may not conform to the federal income tax consequences summarized above. Consequently, prospective investors should consult their tax advisors regarding the effect of state, local and foreign tax laws on an investment in our stock.

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SELECTED PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS

The following summary of selected provisions of the Maryland General Corporation Law, as amended from time to time, and of our charter and bylaws does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland law and to our charter and bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus is a part.

Removal of Directors

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

Business Combinations

    Under the Maryland General Corporation Law, some business combinations, including a merger, consolidation, share exchange or, in some circumstances, an asset transfer or issuance or reclassification of equity securities, between:

•

a Maryland corporation, and



•

(i) any person who beneficially owns 10% or more of the voting power of the corporation's shares, or (ii) 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, also known as an "interested stockholder," or (iii) an affiliate of an interested stockholder, are prohibited for five years after the most recent date on which the interested stockholder becomes an "interested stockholder."

    Thereafter, any of these business combinations must be recommended by the corporation's board of directors and approved by the affirmative vote of at least:

•

80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation, voting together as a single voting group; and



•

two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than voting stock 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 Maryland General Corporation Law, 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 Maryland General Corporation Law 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."

    Our board of directors has adopted a resolution exempting us from the business combination provisions of the Maryland General Corporation Law. The resolution is irrevocable and cannot be repealed or modified by our board of directors at any time in the future.

Control Share Acquisitions

    The Maryland General Corporation Law provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employees of the corporation. "Control shares" are voting shares of stock which, if aggregated with all other shares of stock previously acquired by the acquiror

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or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:

•

one-tenth or more but less than one-third;



•

one-third or more but less than a majority; or



•

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 some exceptions.

    A person who has made or proposes to make a control share acquisition, upon satisfaction of specific 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 specific conditions and limitations, the corporation may redeem any or all of the control shares, except those for which voting rights have previously been approved, for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders' meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of the appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

    The control share acquisition statute does not apply:

•

to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction; or



•

to acquisitions approved or exempted by the charter or bylaws of the corporation.

    Our bylaws contain a provision exempting shares of our common stock from the control share acquisition statute any and all acquisitions by any person. We may amend or eliminate this provision at any time in the future.

Interested Party Transactions

    Pursuant to our charter and bylaws, we will not enter into any transactions or agreements with any of our directors, officers or affiliates except as approved by a majority of our board of directors, including a majority of the independent directors. We have no restrictions on any of our directors, officers or affiliates from engaging for their own account in business activities of the types conducted or to be conducted by us and our affiliates.

Amendments to Our Charter

    We reserve the right to make amendments to our charter, including any amendment which alters the contract rights of any shares of outstanding stock, as currently provided in our charter. Our charter may be amended only by the affirmative vote of holders of shares entitled to cast not less than a majority of all the votes entitled to be cast on the matter. Provisions on removal of directors and other

63

provisions, however, may be amended only by the affirmative vote of holders of shares entitled to cast not less than two-thirds of all the votes entitled to be cast in the election of directors.

Duration and Dissolution

    Our charter provides that we shall have a perpetual duration. Our dissolution must be approved by the affirmative vote of holders of shares entitled to cast not less than two-thirds of all the votes entitled to be cast on the matter.

Advance Notice of Director Nominations and New Business

    Our bylaws provide that:

•

with respect to an annual meeting of our stockholders, nominations of persons for election to our board of directors and the proposal of business to be considered by our stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by our board of directors, or (iii) 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



•

with respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to our board of directors may be made only (i) pursuant to our notice of the meeting, (ii) by our board of directors, or (iii) provided that our board of directors has determined that directors shall be elected at the meeting by holders of shares entitled to cast not less than 50% of the votes entitled to be cast at such meeting who comply with the advance notice provisions set forth in the bylaws.

Possible Anti-Takeover Effect of Selected Provisions of Maryland Law and of Our Charter and Bylaws.

    The control share acquisition provisions of the Maryland General Corporation Law, if we decide in the future to rescind our election to be exempt therefrom, the provisions of our charter on removal of directors and the advance notice provisions could delay, defer or prevent a change in control of our company or other transaction that might involve a premium price for holders of our common stock or otherwise be in their best interest.

Reports to Stockholders

    We will furnish our stockholders with annual reports containing audited financial statements and such other periodic reports as we may determine to furnish or as may be required by law.

64

UNDERWRITING

    Jolson Merchant Partners, Inc. has agreed to act as the underwriter for this public offering of our common stock. Subject to the terms and conditions contained in the underwriting agreement, we have agreed to sell to the underwriter, and the underwriter has agreed to purchase from us, 2,700,000 shares of our common stock. The underwriting agreement provides that the underwriter's obligation to pay for and accept delivery of our common stock is subject to approval of various legal matters by its counsel and to other conditions. The underwriter is obligated to take and pay for all shares of our common stock offered if any of the shares are taken, other than those covered by the over-allotment option described below.

    The underwriter proposes to offer shares of common stock directly to the public at the public offering price per share listed on the cover page of this prospectus and to selected dealers at this price less a concession not in excess of $    per share, of which $    per share may be reallowed to other dealers. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the underwriter. No such reduction shall change the amount of proceeds to be received by us as listed on the cover page of this prospectus. The common stock is offered by the underwriter, subject to receipt and acceptance by it and subject to its right to reject any order in whole or in part.

Over-Allotment Option

    We have granted the underwriter an option, exercisable for 30 days after the date of this prospectus, to purchase up to 405,000 additional shares of common stock to cover over-allotments, if any, at the public offering price less the underwriting discounts and commissions listed on the cover page of this prospectus. If the underwriter exercises the option to purchase any of the 405,000 additional shares of common stock, it will have a firm commitment, subject to a number of conditions, to purchase these shares. If purchased, these additional shares will be sold by the underwriter on the same terms as those on which the shares offered hereby are being sold. We will be obligated, pursuant to the over-allotment option, to sell shares to the underwriter to the extent the over-allotment option is exercised. The underwriter may exercise the over-allotment option only to cover over-allotments made in connection with the sale of the shares of common stock offered in this offering.

    The following table shows the per share and total underwriting discount we will allow to the underwriter. The amounts are shown assuming both no exercise and full exercise of the over-allotment option to purchase 405,000 additional shares of our common stock, if any.

		Total
	Per Share	No Exercise of Option	Full Exercise of Option
Public offering price	$	$	$
Underwriting discount and commissions to be paid by us	$	$	$
Proceeds, before expenses, to us	$	$	$

    We estimate fees and expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $285,000.

Indemnity

    We have agreed to indemnify the underwriter against particular liabilities, including certain liabilities under the Securities Act, or to contribute to payments the underwriter may be required to make in respect thereof.

65

Lock-Up Agreements

    Each of our officers and directors has agreed with the underwriter, for a period of 90 days after the date of this prospectus, subject to particular exceptions, not to sell any shares of our common stock or any securities convertible into or exchangeable for shares of our common stock owned by them, without the prior written consent of the underwriter. However, the underwriter may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these agreements.

Listing

    Our common stock is quoted on the American Stock Exchange under the symbol "AXM."

Stabilization

    In connection with this offering, the underwriter is permitted to engage in certain transactions that stabilize the price of our common stock. These transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock. If the underwriter creates a short position in our common stock in connection with this offering by selling more than 3,105,000 shares of common stock, it may reduce that short position by purchasing our common stock in the open market. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of those purchases. Neither we nor the underwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor the underwriter make any representation that the underwriter will engage in those transactions or that those transactions, once commenced, will not be discontinued without notice.

Other Agreements

    Jolson Merchant Partners, Inc. or its affiliates may provide us with investment banking, financial advisory, or commercial banking services in the future, for which it may receive customary compensation.

EXPERTS

    The financial statements as of December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, included in and incorporated by reference in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is included and incorporated by reference herein, and have been so included and incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

LEGAL MATTERS

    The validity of our securities offered in this prospectus and selected federal tax matters will be passed upon for us by O'Melveny & Myers LLP, San Francisco, California. Selected legal matters related to Maryland law will be passed upon for us by Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland. Selected legal matters will be passed upon for the underwriter by Manatt, Phelps & Phillips, LLP, Los Angeles, California, counsel to the underwriter.

66

WHERE YOU CAN FIND MORE INFORMATION

    We are subject to the information requirements of the Securities Exchange Act of 1934, the Exchange Act, and in accordance with the Exchange Act we file reports, proxy statements and other information with the SEC. Our reports, proxy statements and most other information that we file with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional office located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this material may be obtained by mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains our reports, proxy statements and other information as well as documents from other companies that file electronically with the SEC and the address is http://www.sec.gov.

    Our internet address is www.apexreit.com. The information contained on our website and on any websites linked by our website, however, is not part of this prospectus and you should not rely on such information in deciding whether to invest in our company.

    Our common stock is traded on the American Stock Exchange under the symbol "AXM." Our reports and proxy statements are also available for inspection at the offices of the American Stock Exchange at 86 Trinity Place, New York, New York 10006-1881.

INFORMATION INCORPORATED BY REFERENCE

    The SEC allows us to "incorporate by reference" the information that we file with the SEC. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, except for any information superseded by information in this prospectus. We have filed with the SEC and hereby incorporate by reference our Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001, June 30, 2001 and September 30, 2001.

    Any documents we file pursuant to Section 13(a) or 15(d) of the Exchange Act after the date of this prospectus and prior to the termination of the offering of the securities to which this prospectus relates will automatically be deemed to be incorporated by reference in this prospectus and to be a part of this prospectus from the date of filing those documents. Any statement contained in this prospectus or in a document incorporated by reference shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in those documents modifies or supersedes that statement.

    We will provide without charge to each person to whom this prospectus is delivered, upon written or oral request, a copy of any or all of the documents referred to above which have been or may be incorporated by reference in this prospectus. Requests for these documents should be directed to Ms. Racheal Perry, Apex Mortgage Capital, Inc., 865 South Figueroa Street, 21st floor, Los Angeles, California 90017, telephone: (213) 244-0561.

    You should rely only on the information contained in or incorporated by reference into this prospectus. Neither we nor the underwriter have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The information in this prospectus is current as of the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since the date of this prospectus.

67

APEX MORTGAGE CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS

	Page
Audited Financial Statements
Independent Auditors' Report	F-2
Balance Sheets of the Company as of December 31, 2000 and December 31, 1999	F-3
Statements of Operations of the Company for the years ended December 31, 2000, December 31, 1999 and December 31, 1998	F-4
Statements of Stockholders' Equity of the Company for the year ended December 31, 2000	F-5
Statements of Cash Flows of the Company for the years ended December 31, 2000, December 31, 1999 and December 31, 1998	F-6
Notes to Audited Financial Statements of the Company	F-7
Unaudited Financial Statements
Balance Sheets of the Company as of September 30, 2001 and December 31, 2000	F-23
Statements of Operations of the Company for the three months ended September 30, 2001 and 2000 and the nine months ended September 30, 2001 and 2000	F-24
Statements of Stockholders' Equity of the Company for the three months ended March 31, June 30 and September 30, 2001	F-25
Statements of Cash Flows of the Company for the three months ended September 30, 2001 and 2000 and the nine months ended September 30, 2001 and 2000	F-26
Notes to Unaudited Financial Statements of the Company	F-27

F–1

INDEPENDENT AUDITORS' REPORT

To the Stockholders of
Apex Mortgage Capital, Inc.

    We have audited the accompanying balance sheets of Apex Mortgage Capital, Inc. (the "Company") as of December 31, 2000 and 1999 and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

    In our opinion such financial statements referred to above present fairly, in all material respects, the financial position of Apex Mortgage Capital, Inc. as of December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 9, 2001

F–2

APEX MORTGAGE CAPITAL, INC.
BALANCE SHEETS

		December 31, 2000			December 31, 1999
ASSETS
Cash and cash equivalents		$	140,000		$	2,605,000
Fixed income securities available-for-sale, at fair value (Note 3)			600,131,000			701,143,000
Equity securities available-for-sale, at fair value (Note 3)			9,068,000			17,481,000
Accrued interest receivable			3,734,000			6,254,000
Principal payments receivable			288,000			3,537,000
Unrealized gain on forward contracts (Note 11)			—			3,909,000
Other assets			712,000			816,000
		$	614,073,000		$	735,745,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
	Reverse repurchase agreements (Note 5)	$	545,434,000		$	672,660,000
	Payable for unsettled securities		14,514,000			—
	Accrued interest payable		569,000			3,660,000
	Dividend payable		2,073,000			2,724,000
	Unrealized loss on forward contracts (Note 11)		3,731,000			—
	Deferred gain on interest rate swap contracts		2,546,000			—
	Accrued expenses and other liabilities		823,000			660,000
			569,690,000			679,704,000
Commitments and contingencies (Notes 3, 4, 10, and 11)			—			—
Stockholders' Equity
	Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; no shares outstanding		—			—
	Common stock, par value $0.01 per share; 100,000,000 shares authorized; 6,700,100 shares outstanding (Notes 7 and 9)		67,000			67,000
Additional paid-in-capital			93,360,000			93,265,000
Accumulated other comprehensive income (loss)			(1,079,000	)		(26,513,000	)
Accumulated dividend distributions in excess of net income			(37,396,000	)		(209,000	)
Treasury stock, at cost (947,100 shares) (Note 7)			(10,569,000	)		(10,569,000	)
			44,383,000			56,041,000
		$	614,073,000		$	735,745,000

See accompanying notes to financial statements

F–3

APEX MORTGAGE CAPITAL, INC.
STATEMENTS OF OPERATIONS

		Year Ended December 31,
		2000			1999		1998
Interest Income:
	Fixed income securities	$	42,618,000		$	52,216,000	$	41,265,000
	Cash and cash equivalents		216,000			301,000		710,000
			42,834,000			52,517,000		41,975,000
Interest Expense			33,779,000			42,345,000		36,007,000
Net Interest Income			9,055,000			10,172,000		5,968,000
Net Gain (Loss) on Investment Transactions			(36,703,000	)		1,938,000		1,047,000
Dividend Income			1,139,000			2,387,000		636,000
General and Administrative Expenses:
	Management fee (Note 8)		512,000			629,000		644,000
	Incentive fee (Note 8)		—			1,714,000		619,000
	Professional fees		382,000			73,000		75,000
	Insurance expense		272,000			267,000		267,000
	Directors' fees		76,000			60,000		70,000
	Stock option expense (Note 9)		95,000			287,000		118,000
	Other		397,000			355,000		311,000
			1,734,000			3,385,000		2,104,000
Net Income (Loss)		$	(28,243,000	)	$	11,112,000	$	5,547,000
Net Income (Loss) Per Share:
	Basic	$	(4.91	)	$	1.93	$	0.90
	Diluted	$	(4.91	)	$	1.92	$	0.90
Weighted Average Number of Shares Outstanding:
	Basic		5,753,000			5,753,000		6,190,000
	Diluted		5,753,000			5,779,000		6,190,000
Dividends Declared Per Share		$	1.51		$	1.72	$	1.07

See accompanying notes to financial statements

F–4

APEX MORTGAGE CAPITAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY

										Accumulated Dividend Distributions in Excess of Net Income
		Common Stock					Accumulated Other Comprehensive Income (Loss)
					Additional Paid-in Capital								Comprehensive Income/(Loss)			Treasury Stock, At Cost
		Shares	Amount																Total
Balance, January 1, 1998		6,700,100	$	67,000	$	92,860,000	$	188,000		$	(118,000	)							$	92,997,000
Repurchases of common stock		—		—		—		—								$	(10,569,000	)		(10,569,000	)
Issuance of stock options to non-employees (Note 9)		—		—		118,000		—												118,000
Net income		—		—		—		—			5,547,000		$	5,547,000			—			5,547,000
Other comprehensive income:
	Net unrealized gain on investments available-for-sale, net of reclassification adjustment (Note 13)	—		—		—		6,501,000						6,501,000			—			6,501,000
Comprehensive income														12,048,000
Dividends declared		—		—		—		—			(6,564,000	)					—			(6,564,000	)
Balance, December 31, 1998		6,700,100		67,000		92,978,000		6,689,000			(1,135,000	)					(10,569,000	)		88,030,000
Issuance of stock options to non-employees (Note 9)		—		—		287,000		—			—						—			287,000
Net income		—		—		—		—			11,112,000			11,112,000			—			11,112,000
Other comprehensive income:
	Net unrealized (loss) on investments available-for-sale, net of reclassification adjustment (Note 13)	—		—		—		(37,111,000	)		—			(37,111,000	)		—			(37,111,000	)
	Unrealized gain on forward contracts	—		—		—		3,909,000						3,909,000			—			3,909,000
Comprehensive income (loss)		—		—		—		—			—			(22,090,000	)					—
Dividends declared		—		—		—		—			(10,186,000	)					—			(10,186,000	)
Balance, December 31, 1999		6,700,100		67,000		93,265,000		(26,513,000	)		(209,000	)					(10,569,000	)		56,041,000
Issuance of stock options to non-employees (Note 9)						95,000														95,000
Net loss											(28,243,000	)	$	(28,243,000	)					(28,243,000	)
Other comprehensive income:
	Net unrealized gain on investments available-for-sale, net of reclassification adjustment (Note 13)							32,860,000						32,860,000						32,860,000
	Unrealized (loss) and net deferred losses on forward contracts, net of reclassification adjustment (Note 13)							(7,426,000	)					(7,426,000	)					(7,426,000	)
Comprehensive income (loss)													$	(2,809,000	)
Dividends declared											(8,944,000	)								(8,944,000	)
Balance, December 31, 2000		6,700,100	$	67,000	$	93,360,000	$	(1,079,000	)	$	(37,396,000	)				$	(10,569,000	)	$	44,383,000

See accompanying notes to financial statements

F–5

APEX MORTGAGE CAPITAL, INC.
STATEMENTS OF CASH FLOWS

			Year Ended December 31,
			2000			1999			1998
Operating Activities:
	Net Income (Loss)		$	(28,243,000	)	$	11,112,000		$	5,547,000
	Adjustments to reconcile net income to net cash provided by operating activities:
	Amortization			(2,559,000	)		668,000			3,533,000
	Net (gain) loss on investment transactions			36,703,000			(1,938,000	)		(1,047,000	)
Change in assets and liabilities:
	Accrued interest receivable			2,520,000			(1,103,000	)		(3,835,000	)
	Other assets			104,000			(239,000	)		275,000
	Accrued interest payable			(3,091,000	)		(2,513,000	)		6,063,000
	Accrued expenses and other liabilities			163,000			(92,000	)		(724,000	)
		Net cash provided by operating activities		5,597,000			5,895,000			9,812,000
Investing Activities:
	Purchase of equity securities			—			(12,946,000	)		(19,716,000	)
	Purchase of fixed income securities			(133,930,000	)		(117,094,000	)		(1,511,359,000	)
	Purchase of interest rate caps			—			—			(80,000	)
	Payments on closed forward contracts			(23,283,000	)		—			—
	Proceeds from sales of equity securities			6,481,000			9,636,000			1,662,000
	Proceeds from sales of fixed income securities			193,953,000			40,406,000			594,201,000
	Proceeds from closed forward contracts			6,091,000			—			—
	Proceeds from sales of interest rate caps			—			172,000			—
	Proceeds from terminating interest rate swaps			5,554,000			—			—
	Principal payments on fixed income securities			73,893,000			168,344,000			270,608,000
		Net cash provided by (used in) investing activities		128,759,000			88,518,000			(664,684,000	)
Financing Activities:
	Net proceeds from reverse repurchase agreements			(127,226,000	)		(95,248,000	)		680,090,000
	Dividend distributions			(9,595,000	)		(9,239,000	)		(5,055,000	)
	Purchase of treasury stock			—			—			(10,569,000	)
		Net cash used in financing activities		(136,821,000	)		(104,487,000	)		664,466,000
Net Increase (Decrease) in Cash and Cash Equivalents				(2,465,000	)		(10,074,000	)		9,594,000
Cash and Cash Equivalents at Beginning of Period				2,605,000			12,679,000			3,085,000
Cash and Cash Equivalents at End of Period			$	140,000		$	2,605,000		$	12,679,000
Supplemental Disclosure of Cash Flow Information:
	Cash paid for interest		$	39,711,000		$	44,970,000		$	29,944,000
Noncash Investing and Financing Activities:
Net unrealized loss on securities available-for-sale and forward contracts			$	25,434,000		$	(33,202,000	)	$	6,501,000
Principal payments, not yet received			$	3,249,000		$	2,600,000		$	937,000
Securities purchased, not yet settled			$	14,514,000		$	838,000		$	87,800,000
Dividends declared, not yet paid			$	2,073,000		$	2,724,000		$	1,777,000

See accompanying notes to financial statements

F–6

APEX MORTGAGE CAPITAL, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2000

Note 1—The Company

    Apex Mortgage Capital, Inc. (the "Company") was incorporated in Maryland on September 15, 1997. The Company commenced its operations of acquiring and managing a portfolio of mortgage assets on December 9, 1997, upon receipt of the net proceeds from the initial public offering of the Company's Common Stock. The Company uses its equity capital and borrowed funds to seek to generate income based on the difference between the yield on its investments and the cost of its borrowings. The Company is structured for tax purposes as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").

Note 2—Summary of Significant Accounting Policies

Cash and Cash Equivalents

    Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value.

Fixed Income Securities

    The Company's fixed income securities consist primarily of residential mortgage securities and other fixed income securities. All fixed income securities are recorded at cost on the date the assets are purchased. Realized gains and losses on sales of the securities are determined on an average cost basis. A majority of the Company's fixed income securities are expected to qualify as real estate assets under the REIT Provisions of the Code.

    Interest income on the Company's mortgage securities is accrued based on the actual coupon rate and the outstanding principal amount. Premiums and discounts are amortized into interest income over the lives of the securities using the effective yield method adjusted for the effects of estimated prepayments.

    Interest income on the Company's other fixed income securities is accrued using the effective interest method applied prospectively based on current market assumptions. When securities are deemed to be impaired, an impairment reserve is recorded. Such reserve is accounted for as an adjustment to the cost of the securities and is accreted into income on the same basis as the original discount.

    The Company's policy is to generally classify its fixed income securities as available-for-sale. The fixed income securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income.

Equity Securities

    The Company's equity securities consist primarily of equity securities issued by other real estate investment trusts.

    Dividend income on equity securities is recorded on the declaration date. Realized gains and losses on sales of the securities are determined on an average cost basis. A majority of the Company's equity securities are expected to qualify as real estate assets under the REIT Provisions of the Code.

F–7

    The Company's policy is to generally classify its equity securities as available-for-sale. Equity securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income.

Interest Rate Hedging Transactions

    The Company enters into interest rate swap and interest rate cap agreements in order to mitigate the impact of rising interest rates on the cost of its short-term borrowings. Amounts payable or receivable from such agreements are accounted for on an accrual basis and recognized as a net adjustment to interest expense. Premiums paid for cap agreements accounted for as hedges are recorded as other assets and amortized over the lives of such agreements as an adjustment to interest expense. Realized gains and losses on terminated swaps accounted for as hedges are recorded as other assets or other liabilities and amortized over the original lives of the agreements as an adjustment to interest expense.

    The Company also enters into forward contracts to sell U.S. Treasury notes in order to mitigate the negative impact of rising interest rates on the fair value of its fixed income securities available-for-sale. Unrealized gains and losses on open forwards are shown as assets and liabilities, respectively, and as accumulated other comprehensive income in the balance sheets. Realized gains and losses on terminated forwards are recorded as deferred gains and losses and included in accumulated other comprehensive income in the balance sheets, and are amortized over the remaining lives of the fixed income securities being hedged as an adjustment to income in the statements of operations.

Stock Based Compensation

    The Company grants stock options to its directors and officers and to certain directors, officers and employees of its investment manager and the investment manager itself, as discussed in Note 9. Options granted to directors of the Company are accounted for using the intrinsic value method, and generally no compensation expense is recognized in the statements of operations for such options. Other options are accounted for using the fair value method; such options are measured at their fair value when they are granted and are recognized as a general and administrative expense during the periods when the options vest and the related services are performed.

Federal and State Income Taxes

    The Company has elected to be taxed as a REIT and generally is not subject to federal and state taxes on its income to the extent it distributes annually 95% of its predistribution taxable income to stockholders and meets certain other asset, income and stock ownership tests. As such, no accrual for income taxes has been included in the financial statements.

Net Income Per Share

    Basic net income per share is calculated on the basis of the weighted average number of common shares outstanding during each period. Diluted net income per share includes the additional dilutive effect of Common Stock equivalents and outstanding stock options, and is calculated using the treasury stock method.

F–8

    Stock options that could potentially dilute net income per share in the future were not included in the computation of diluted net income per share in 2000 and 1998 because they would have been antidilutive for the period presented.

Income Recognition

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

Credit Risk

    The Company has limited its exposure to credit losses on its portfolio of fixed income securities by purchasing securities that are either rated "AAA" by at least one nationally recognized rating agency or are issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), Fannie Mae (formerly known as the Federal National Mortgage Corporation) or the Government National Mortgage Association ("GNMA"). The payment of principal and interest on the FHLMC, Fannie Mae and GNMA securities are guaranteed by those respective agencies. In addition, the Company has the ability to purchase up to 10% of the portfolio in below investment grade securities.

Use of Estimates

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

Recently Issued Accounting Standards

    In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement and subsequent amendments establish accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended, is effective for the Company's fiscal year beginning January 1, 2001.

    The Company has reviewed its financial instruments to identify those to which SFAS No. 133 and related amendments apply. Management believes that the only instruments for which the accounting will be affected by SFAS No. 133 are the forward contracts used to hedge fixed income securities. The transition adjustment that will be recorded on January 1, 2001 will result in the reclassification of $2,173,000 net losses of unrealized and deferred gains and losses on investment securities and forward contracts from accumulated other comprehensive income to current income. Also, deferred gains on

F–9

interest rate swaps previously designated as hedges will be reclassified from other liabilities to accumulated other comprehensive income.

    In conjunction with the adoption of SFAS No. 133 on January 1, 2001, the Company will reclassify $594,469,000 of its mortgage securities from the available-for-sale category to the trading category for investments accounted for under SFAS No. 115. This change will result in the reclassification of $1,742,000 net unrealized gains from accumulated other comprehensive income to current income, in addition to net unrealized gains included in the SFAS No. 133 transition adjustment discussed above.

    During the year ended December 31, 1999, the Company wrote off $64,000 of unamortized organization costs in accordance with the adoption of SOP 98-5, Reporting on the Cost of Start-Up Activities.

Note 3—Fixed Income and Equity Securities

    At December 31, 2000, fixed income securities consisted of the following:

	Adjustable Rate Mortgage Securities			Fixed Rate Mortgage Securities			Other Fixed Income Securities			Total
	(in thousands)
Principal Amount	$	39,253		$	557,962		$	10,400		$	607,615
Unamortized Premium (Discount)		978			(2,154	)		(3,712	)		(4,888	)
Impairment Reserve		—			(13,375	)					(13,375	)
Adjusted Cost		40,231			542,433			6,688			589,352
Unrealized Gains		46			11,783			—			11,829
Unrealized Losses		(24	)		—			(1,026	)		(1,050	)
Fair Value	$	40,253		$	554,216		$	5,662		$	600,131

    At December 31, 1999, fixed income securities consisted of the following:

	Adjustable Rate Mortgage Securities			Fixed Rate Mortgage Securities			Other Fixed Income Securities			Total
	(in thousands)
Principal Amount	$	31,923		$	688,162		$	10,400		$	730,485
Unamortized Premium (Discount)		553			1,823			(3,185	)		(809	)
Amortized Cost		32,476			689,985			7,215			729,676
Unrealized Gains		33			—			—			33
Unrealized Losses		(253	)		(27,637	)		(676	)		(28,566	)
Fair Value	$	32,256		$	662,348		$	6,539		$	701,143

F–10

APEX MORTGAGE CAPITAL, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2000

Note 3—Fixed Income and Equity Securities (Continued)

    The contractual final maturity of the mortgage loans supporting the mortgage securities is generally between 15 and 30 years at origination. Because of prepayments on the underlying mortgage loans, the actual weighted-average maturity is expected to be less.

    A portion of the other fixed income securities generally have an original maturity of five years subject to certain acceleration provisions. The expected average remaining maturity at December 31, 2000 and 1999 was approximately 2.0 and 3.0 years, respectively. The remaining portion has a fixed remaining maturity of approximately 1.5 years as of December 31, 2000.

    A portion of the adjustable rate mortgage securities are typically subject to periodic and lifetime caps that limit the amount an adjustable rate mortgage-backed security's interest rate can change during any given period and over the life of the asset. At December 31, 2000, the portion of adjustable rate mortgage securities that were subject to periodic and lifetime caps had an average periodic cap equal to 2.0% per annum and an average lifetime cap equal to 11.3%. At December 31, 1999, the average periodic cap on the adjustable rate mortgage assets was 2.0% per annum and the average lifetime cap was equal to 11.3%.

    During the year ended December 31, 2000 the Company realized $741,000 and $6,536,000 in gains and losses, respectively, on the sale of $97,440,000 and $96,513,000 of fixed income securities, respectively, which were classified as available-for-sale. During the year ended December 31, 1999 the Company realized $219,000 and $25,000 in gains and losses, respectively, on the sale of $5,684,000 and $34,722,000 of fixed income securities, respectively, which were classified as available-for-sale. During the year ended December 31, 1998 the Company realized $972,000 in gains on the sale of $594,201,000 of fixed income securities which were classified as available-for-sale.

    During the year ended December 31, 2000, the Company recorded an impairment reserve of $18,284,000 on its fixed-rate mortgage securities, which is included in net loss on investment transactions in the statements of operations. The impairment reserve represents an other-than-temporary decline in the fair value, as of September 30, 2000, of investments held that the Company no longer intends to hold until maturity. A portion of these investments were sold in the fourth quarter of 2000. The Company could also incur additional losses (or recapture losses already recognized) depending on the actual proceeds of future investment sales or if further impairment charges are required.

    The net deferred loss and unrealized loss of $7,345,000 and $1,079,000, respectively, on forward contracts were reclassified from other comprehensive income into net loss on investment transactions in the statement of operations during the year ended December 31, 2000 as part of the impairment charge recorded on the underlying assets being hedged.

F–11

    At December 31, 2000 and 1999, equity securities consisted of the following:

	December 31, 2000			December 31, 1999
	(in thousands)
Cost	$	13,016		$	19,370
Unrealized Gains		1,091			789
Unrealized Losses		(713	)		(2,678	)
Impairment Reserve		(4,326	)		—
Fair Value	$	9,068		$	17,481

    During the year ended December 31, 2000 the Company realized $348,000 and $222,000 in gains and losses, respectively, on the sale of $3,419,000 and $3,062,000 of equity securities, respectively, which were classified as available-for-sale. During the year ended December 31, 1999 the Company realized $1,916,000 and $10,000 in gains and losses, respectively, on the sale of $9,495,000 and $141,000 of equity securities, respectively, which were classified as available-for-sale. During the year ended December 31, 1998, the Company realized $303,000 in gains on the sale of $1,662,000 of equity securities, which were classified as available-for-sale.

    At December 31, 2000, the Company held equity securities and senior unsecured notes issued by Dynex Capital, Inc. ("Dynex") with fair market values of $2,437,000 and $3,750,000, respectively. During the year ended December 31, 1999, Dynex suspended the payment of dividends on its preferred stock. Accordingly, the Company is no longer recognizing dividend income on its equity investments in Dynex. Dynex is currently paying interest on its senior notes. Accordingly, the Company is recognizing interest income on the senior note investments issued by Dynex. If Dynex were to suspend payment of interest on its senior notes, interest income recognized by the Company would be negatively impacted.

    During the year ended December 31, 2000, the Company recorded an impairment reserve of $3,368,000 on its Dynex preferred stock holdings which is included in net loss on investment transactions in the statement of operations. The Company could also incur additional losses if the remaining Dynex investments are sold or written down further.

    During the year ended December 31, 2000, the Company recorded an impairment reserve on its Dynex Common Stock holdings of $958,000 which is included in net loss on investment transactions in the statement of operations. The Company could also incur additional losses if the remaining Dynex investments are sold or written down further.

Note 4—Interest Rate Cap Agreements and Treasury Put Options

    Interest rate cap agreements include the carrying value of interest rate caps purchased by the Company to mitigate the impact of rising interest rates on the cost of its short-term borrowings. As discussed in Note 10, the Company has entered into certain interest rate swap transactions. The execution of these swaps eliminated the need for the cap protection previously purchased. Accordingly, the interest rate cap agreements no longer qualified for hedge accounting and were written down to zero during the year ended December 31, 1998. During the year ended December 31, 1999, the interest

F–12

rate caps were sold, resulting in a realized gain of $172,000, which is included in net gain on investment transactions in the 1999 statement of operations.

    There were no outstanding interest rate cap agreements as of December 31, 2000 and 1999.

    Under these agreements, the Company received cash payments to the extent of the excess of the three-month London Interbank Offered Rate ("LIBOR") over the agreements' contract rate times the notional amount.

    During the year ended December 31, 1999, the Company purchased put options on ten-year U.S. Treasury futures contracts with a notional amount of $50,000,000. The options did not qualify for hedge accounting under SFAS No. 80 and were therefore accounted for as trading securities under SFAS No. 115. The options expired during 1999, which resulted in a realized loss of $334,000, which is included in net gain on investment transactions in the 1999 statement of operations.

Note 5—Reverse Repurchase Agreements

    The Company has entered into reverse repurchase agreements to finance certain of its investments. These agreements are secured by a portion of the Company's investments and bear interest rates that have historically moved in close relationship to LIBOR.

    At December 31, 2000, the Company had outstanding $545,434,000 of reverse repurchase agreements with a weighted average current borrowing rate of 6.61% and a maturity of 1.1 months. The reverse repurchase agreements were collateralized by securities with an estimated fair value of $564,274,000.

    At December 31, 1999, the Company had outstanding $672,660,000 of reverse repurchase agreements with a weighted average current borrowing rate of 5.98% and a maturity of 2.0 months. The reverse repurchase agreements were collateralized by securities with an estimated fair value of $689,396,000.

    For the year ended December 31, 2000, the average reverse repurchase agreement balance was $576,190,000 with a weighted average interest cost of 6.33%. The maximum reverse repurchase agreement balance outstanding during the year ended December 31, 2000 was $672,660,000.

    For the year ended December 31, 1999, the average reverse repurchase agreement balance was $732,960,000 with a weighted average interest cost of 5.28%. The maximum reverse repurchase agreement balance outstanding during the year ended December 31, 1999 was $812,019,000.

F–13

APEX MORTGAGE CAPITAL, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2000

Note 6—Fair Value of Financial Instruments

    The following table presents the amortized cost and estimated fair values of the Company's financial instruments. SFAS No. 107, Disclosures About Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale:

	At December 31, 2000					At December 31, 1999
	Adjusted Cost		Fair Value			Adjusted Cost		Fair Value
	(dollars in thousands)
Mortgage related securities	$	582,664	$	594,469		$	722,461	$	694,604
Equity securities		8,690		9,068			19,360		17,481
Other fixed income securities		6,688		5,662			7,215		6,539
Interest rate swaps		—		—			—		3,815
Forward contracts		—		(3,731	)		—		3,909

    Adjusted cost in the table above includes the net effect of unamortized impairment reserves.

    The Company bases its fair value estimates for mortgage related securities, equity securities, other fixed income securities, interest rate swaps, and forward contracts primarily on third party price indications provided by dealers who make markets in these financial instruments when such indications are available. However, the fair value reported reflects estimates and may not necessarily be indicative of the amounts the Company could realize in a current market exchange. Cash and cash equivalents, interest receivable and reverse repurchase agreements are reflected in the financial statements at their costs, which approximates their fair value because of the short-term nature of these instruments.

Note 7—Stock Repurchase Program

    The Company's Board of Directors has authorized a program to repurchase shares of the Company's Common Stock. At December 31, 2000 and 1999, the Company was authorized to repurchase an additional 552,900 shares of the Company's Common Stock pursuant to the repurchase program.

    At December 31, 2000 and 1999, the Company held 947,100 shares of treasury stock repurchased in 1998. During the years ended December 31, 2000 and 1999, the Company did not repurchase any treasury shares.

Note 8—Transactions with Affiliates

    The Company has entered into a Management Agreement (the "Management Agreement"), as amended, with TCW Investment Management Company (the "Manager"), a wholly owned subsidiary of The TCW Group, Inc., under which the Manager will manage its day-to-day operations, subject to the direction and oversight of the Company's Board of Directors. The Company will pay the Manager annual base management compensation, payable monthly in arrears, equal to ³/4 of 1% of the average net invested capital as further defined in the Management Agreement.

    The Company recorded expense of $512,000, $629,000, and $644,000 in base management compensation to the Manager during the years ended December 31, 2000, 1999 and 1998, respectively.

F–14

The accrued liability for base management compensation was $85,000 and $157,000 at December 31, 2000 and 1999, respectively.

    The Company also pays the Manager, as incentive compensation, an amount equal to 30% of the Net Income of the Company, before incentive compensation, in excess of the amount that would produce an annualized return on equity equal to the ten-year US Treasury rate plus 1% as further defined in the Management Agreement.

    The Company recorded expense of $1,714,000 and $619,000 for incentive compensation to the Manager for the years ended December 31, 1999 and 1998, respectively. No incentive compensation was incurred for the year ended December 31, 2000.

    There was no accrued liability for incentive compensation at December 31, 2000. The accrued liability for incentive compensation was $216,000 at December 31, 1999.

    The Company may also grant stock options to directors, officers and key employees of the Company, the Manager, its directors, officers and key employees (see Note 9).

    The Management Agreement may be renewed each year at the discretion of the Company's Board of Directors, unless previously terminated by the Company or the Manager upon written notice. Except in the case of a termination or non-renewal by the Company for cause, upon termination or non-renewal of the Management Agreement by the Company, the Company is obligated to pay the Manager a termination or non-renewal fee, which may be significant. The termination or non-renewal fee shall be equal to the fair market value of the Management Agreement without regard to the Company's termination right, as determined by an independent appraisal. Neither the fair market value of the Management Agreement nor the various factors that an appraiser may find relevant in its determination of the fair market value can be determined at this time. The fair market value of the Management Agreement will be affected by significant variables, including (i) the historical management fees paid to the Manager, (ii) any projections of future management fees to be paid to the Manager determined by the independent appraiser, (iii) the relative valuations of agreements similar to the Management Agreement and (iv) other factors, all of which may be unrelated to the performance of the Manager. Similar management agreements have been valued at as much as eight times the historical annual fees paid under such agreements. Any termination or non-renewal fee paid may be materially greater than eight times historical fees and the Company can provide no assurance at this time as to the amount of any such fee.

    The Company's other fixed income investments include securities that are issued by special purpose companies that invest primarily in mortgage-related assets. The Manager serves as the investment manager to these companies and is paid fees in connection with such services. The Company does not anticipate paying any management fees directly to the Manager in connection with these investments.

Note 9—Stock Options

    The Company has adopted a stock option plan (the "Amended and Restated 1997 Stock Option Plan") that provides for the grant of both qualified incentive stock options that meet the requirements of Section 422 of the Code, and non-qualified stock options, stock appreciation rights and dividend

F–15

equivalent rights. Stock options may be granted to directors of the Company ("employees"), and to the Manager and the directors, officers and key employees of the Manager ("non-employees").

    The exercise price for any stock option granted under the Amended and Restated 1997 Stock Option Plan may not be less than 100% of the fair market value of the shares of Common Stock at the time the option is granted. Each option must terminate no more than ten years from the date it is granted. Subject to anti-dilution provisions for stock splits, stock dividends and similar events, the Amended and Restated 1997 Stock Option Plan authorizes the grant of options to purchase an aggregate of 1,000,000 shares of Common Stock.

    The Company recognized stock option expense relating to the options granted to the non-employees of $95,000, $287,000 and $118,000 during the years ended December 31, 2000, 1999 and 1998, respectively.

    For stock options outstanding at December 31, 2000, the range of exercise prices is $6.98 to $15.00 per share and the weighted-average remaining contractual life is 8.19 years.

    For the year ended December 31, 2000, options to purchase 183,000 shares of the Company's Common Stock were granted to directors of the Company and options to purchase 125,000 shares were granted to officers of the Company and officers and key employees of the Manager. The exercise price of the options granted during 2000 was $6.98 per share. None of the options granted during 2000 include dividend equivalent rights.

    The fair value of each option granted during 2000 was estimated to be $0.04 as of the grant date using the Black-Scholes option pricing model with the following assumptions: dividend yield of 20% per annum; expected volatility of 30%; risk free interest rate of 5.22% per annum; and an expected life of 10 years.

    The options granted during 2000 expire in December 2010 and vested in two equal installments during the month of December in 2001 and 2002.

    For the year ended December 31, 1998, options to purchase 112,000 shares of the Company's Common Stock were granted to directors of the Company and options to purchase 58,000 shares were granted to officers of the Company and officers and key employees of the Manager. The exercise price of the options granted during 1998 was $10.38 per share. All of the options granted during 1998 include dividend equivalent rights that entitle the option holder to receive a cash payment equal to the dividends declared on the Company's Common Stock multiplied by the number of options held until the options are exercised or expire.

    The fair value of each option granted during 1998 was estimated to be $5.32 as of the grant date using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0% per annum (to account for the dividend equivalent rights); expected volatility of 30%; risk free interest rate of 4.57% per annum; and an expected life of 10 years.

    The options granted during 1998 expire in December 2008 and vested in two equal installments during the month of December in 1999 and 2000.

    For the year ended December 31, 1997, options to purchase 210,000 shares of the Company's Common Stock were granted to directors of the Company and options to purchase 190,000 shares were

F–16

granted to officers of the Company and officers and key employees of the Manager. The exercise price of the options granted during 1997 was $15 per share.

    The fair value of each option granted during 1997 was estimated to be $1.05 as of the grant date using the Black-Scholes option pricing model with the following assumptions: dividend yield of 11% per annum; expected volatility of 30%; risk free interest rate of 5.82% per annum; and an expected life of 10 years.

    The options granted during 1997 expire in December 2007 and vest in three equal installments during the month of February in 1999, 2000 and 2001.

    If the Company had recorded stock option grants to Company directors at fair value and related compensation expense, the pro forma effect on the Company's net income and earnings per share would have been as follows:

	Year Ended December 31, 2000			Year Ended December 31, 1999		Year Ended December 31, 1998
Net (loss) income—as reported	$	(28,243,000	)	$	11,112,000	$	5,547,000
Net (loss) income—pro forma	$	(28,409,000	)		10,611,000		5,411,000
Basic earnings per share—as reported	$	(4.91	)	$	1.93	$	0.90
Diluted earnings per share—as reported	$	(4.91	)	$	1.92	$	0.90
Basic earnings per share—pro forma	$	(4.94	)	$	1.84	$	0.87
Diluted earnings per share—pro forma	$	(4.94	)	$	1.84	$	0.87

    Information regarding stock option activity during the years ended December 31, 2000, 1999, and 1998 is as follows:

	Shares	Weighted Average Exercise Price
Options Outstanding at January 1, 1998	400,000	$	15.00
Options Granted During 1998	170,000		10.38
Exercised	—		—
Expired	—		—
Options Outstanding at December 31, 1998 and 1999	570,000		13.62
Options Granted During 2000	308,000		6.98
Exercised	—		—
Expired	—		—
Options Outstanding at December 31, 2000	878,000	$	11.29

F–17

Note 10—Contractual Commitments

    There were no interest rate swap agreements at December 31, 2000.

    During the year ended December 31, 1999 the Company entered into interest rate swap agreements as summarized below. Under these agreements, the Company received a floating rate and paid a fixed rate.

December 31, 1999:

Current Notional Amount (000)	Average Fixed Rate	Floating Rate	Average Termination Date	Unrealized Gains (000)
$400,129	5.869%	1Mo LIBOR	8/9/2001	$3,815

    The Company received $334,000 from the swap counter-parties during the year ended December 31, 2000, which is netted against interest expense in the statements of operations. The Company paid $3,614,000 and $414,000 to the swap counter-parties during the years ended December 31, 1999 and 1998, respectively, which is included in interest expense in the statements of operations.

    During the year ended December 31, 2000, the Company terminated all outstanding interest rate swap agreements with a combined notional amount of $386,213,000 which resulted in a deferred gain of $5,554,000 that is being amortized over the remaining life of the original swap agreements. The deferred gain is included in other liabilities on the balance sheet and the amortization expense is included in interest expense in the statements of operations. During the year ended December 31, 2000, $3,008,000 of the deferred gain was amortized. Approximately 92% of the deferred gain will be amortized by August 31, 2001. The remaining deferred gain will be fully amortized by May 31, 2002.

    During the year ended December 31, 1999, the Company terminated interest rate swap agreements with a combined notional amount of $255,530,000 which resulted in a net deferred loss of $66,000 that is being amortized over the remaining life of the original swap agreements. The net deferred loss is included in other assets on the balance sheet and the amortization expense is included in interest expense on the statements of operations. During years ended December 31, 2000 and 1999, $23,000 and $42,000 of the net deferred loss was amortized, respectively.

    The Company is generally required to deposit collateral with the swap agreement counter-parties in an amount at least equal to the amount of any unrealized losses. At December 31, 1999 the Company had securities with a fair market value of $2,592,000 on deposit with its counter-parties. At December 31, 1999 the Company received fixed income securities with a fair market value of $1,600,000 as a deposit from a swap agreement counter-party.

F–18

Note 11—Forward Contracts

    At December 31, 2000, the Company had open forward contracts to sell U.S. Treasury notes with terms stated below.

Current Notional Amount (000)	Average Termination Date	Net Unrealized Losses (000)	Average Maturity of Underlying Securities
$575,000	1/19/2001	$(3,731)	2.99 Years

    At December 31, 1999, the Company had open forward contracts to sell U.S. Treasury notes with terms stated below.

Current Notional Amount (000)	Average Termination Date	Unrealized Gains (000)	Average Maturity of Underlying Securities
$335,000	2/12/2000	$3,909	3.36 Years

    During the year ended December 31, 2000, forward contracts to sell U.S. Treasury notes with a notional amount of $5,670,000,000 were closed resulting in a net deferred loss of $16,860,000. $8,425,000 of the deferred loss incurred was reclassified from other comprehensive income into net loss on investment transactions in the statement of operations during the year ended December 31, 2000 as part an impairment charge recorded on the underlying assets being hedged. The Company anticipates reclassifying the remaining deferred and unrealized losses from other comprehensive income into a net loss line item in the statement of operations on January 1, 2001 in connection with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133.

    During the year ended December 31, 1999, two forward contracts to sell U.S. Treasury notes with a notional amount of $135,000,000 and $100,000,000 were closed resulting in a deferred loss of $390,000 and deferred gain of $51,000, respectively. The deferred loss and gain are being amortized as an adjustment to interest income over the remaining weighted average lives of the fixed income securities being hedged, which was 4.8 years at December 31, 1999.

    The contracts were entered into to mitigate the negative impact of rising interest rates on fixed income securities available-for-sale that generally have a market-weighted average duration approximately equal to the contracts shown above.

F–19

Note 12—Adoption of Shareholder Rights Plan

    On June 30, 1999, the Board of Directors of Apex Mortgage Capital, Inc. (the "Company") declared a dividend distribution of one Right for each outstanding share of Company Common Stock to stockholders of record at the close of business on July 30, 1999 (the "Record Date"). Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (the "Preferred Stock"), at a Purchase Price of $50, subject to adjustment. The description and terms of the Rights are set forth in a Shareholder Rights Agreement (the "Rights Agreement") between the Company and The Bank of New York, as Rights Agent.

    Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights Certificates will be distributed. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common Stock and a Distribution Date will occur upon the earlier of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date"), other than as a result of repurchases of stock by the Company or certain inadvertent actions by institutional or certain other stockholders or (ii) 10 business days (or such later date as the Board shall determine) following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person. Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates issued after the Record Date will contain a notation incorporating the Rights Agreement by reference and (iii)the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. Pursuant to the Rights Agreement, the Company reserves the right to require that, prior to the occurrence of a triggering event, upon any exercise of Rights, a number of Rights be exercised so that only whole shares of Preferred Stock will be issued.

    The Rights are not exercisable until the Distribution Date and will expire on July 30, 2009, unless earlier redeemed or exchanged by the Company.

F–20

APEX MORTGAGE CAPITAL, INC.

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2000

Note 13—Reclassification Adjustments of Comprehensive Income

    The following is a presentation of the reclassification amounts to comprehensive income for the years ended December 31, 2000, 1999 and 1998:

	For the Year Ended December 31, 2000			For the Year Ended December 31, 1999			For the Year Ended December 31, 1998
Unrealized gains (losses) arising during the year	$	1,315,000		$	(36,212,000	)	$	6,689,000
Less: reclassification of net losses to impairment reserve		22,610,000			—			—
Less: reclassification adjustment for net losses (gains) resulting from asset sales		8,935,000			(899,000	)		(188,000	)
Net unrealized gains (losses) on investments available-for-sale	$	32,860,000		$	(37,111,000	)	$	6,501,000
Net deferred (losses) from forward contracts closed during the year	$	(16,860,000	)	$	—		$	—
Less: reclassification of net deferred and unrealized losses to impairment reserve		8,424,000			—			—
Less: reclassification adjustment for net losses included in net income		346,000			—			—
Less: reclassification adjustment for net losses resulting from asset sales		664,000			—			—
Net unrealized (loss) and deferred losses on forward contracts	$	(7,426,000	)	$	—		$	—

F–21

Note 14—Summarized Quarterly Results (Unaudited)

    The following is a presentation of the quarterly results of operations (amounts are in thousands except per share amounts):

		Year Ended December 31, 2000
		Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Interest Income		$	10,224		$	9,580		$	10,893		$	12,137
Interest Expense			7,901			7,600			8,590			9,688
	Net Interest Income		2,323			1,980			2,303			2,449
Net Gain (Loss) on Investment Transactions			741			(29,912	)		(7,532	)		—
Dividend Income			230			185			354			370
General and Administrative Expenses			(290	)		(680	)		(241	)		(523	)
	Net (Loss) Income	$	3,004		$	(28,427	)	$	(5,116	)	$	2,296
Basic EPS		$	0.52		$	(4.94	)	$	(0.89	)	$	0.40
Diluted EPS		$	0.52		$	(4.94	)	$	(0.89	)	$	0.40
Average Number of Shares Outstanding—Basic (net of treasury shares)			5,753			5,753			5,753			5,753
Average Number of Shares Outstanding—Diluted (net of treasury shares)			5,753			5,753			5,753			5,753
Dividend Declared Per Share		$	0.35		$	0.35		$	0.35		$	0.46

		Year Ended December 31, 1999
		Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Interest Income		$	12,375		$	13,124		$	13,081		$	13,937
Interest Expense			10,093			10,231			10,760			11,261
	Net Interest Income		2,282			2,893			2,321			2,676
Net Gain on Investment Transactions			225			437			662			614
Dividend Income			489			503			684			711
General and Administrative Expenses			(665	)		(868	)		(813	)		(1,039	)
	Net Income	$	2,331		$	2,965		$	2,854		$	2,962
Basic EPS		$	0.41		$	0.52		$	0.50		$	0.51
Diluted EPS		$	0.40		$	0.51		$	0.49		$	0.51
Average Number of Shares Outstanding—Basic (net of treasury shares)			5,753			5,753			5,753			5,753
Average Number of Shares Outstanding—Diluted (net of treasury shares)			5,771			5,784			5,787			5,773
Dividend Declared Per Share		$	0.46		$	0.46		$	0.42		$	0.38

*      *      *

F–22

APEX MORTGAGE CAPITAL, INC.

BALANCE SHEETS

(Unaudited)

		September 30, 2001			December 31, 2000
ASSETS
Cash and cash equivalents		$	1,844,000		$	140,000
Fixed income trading securities, at fair value (Note 3)			515,942,000			—
Fixed income securities available-for-sale, at fair value (Note 3)			5,722,000			600,131,000
Equity securities available-for-sale, at fair value (Note 3)			11,954,000			9,068,000
Accrued interest receivable			3,294,000			3,734,000
Principal payments receivable			127,000			288,000
Other assets			583,000			712,000
		$	539,466,000		$	614,073,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
	Reverse repurchase agreements (Note 4)	$	479,790,000		$	545,434,000
	Payable for unsettled securities		354,000			14,514,000
	Accrued interest payable		499,000			569,000
	Dividend payable		2,369,000			2,073,000
	Unrealized loss on forward contracts, at fair value (Note 10)		987,000			3,731,000
	Deferred gain on interest rate swap contracts		—			2,546,000
	Accrued expenses and other liabilities		3,017,000			823,000
			487,016,000			569,690,000
Commitments and contingencies (Notes 3, 4, 9, and 10)
Stockholders' Equity
	Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; no shares outstanding
	Common stock, par value $0.01 per share; 100,000,000 shares authorized; 5,753,000 shares outstanding (Notes 6 and 8)		58,000			58,000
	Additional paid-in-capital		82,831,000			82,800,000
	Accumulated other comprehensive income (loss)		4,559,000			(1,079,000	)
	Accumulated deficit		(34,998,000	)		(37,396,000	)
			52,450,000			44,383,000
		$	539,466,000		$	614,073,000

See accompanying notes to financial statements

F–23

APEX MORTGAGE CAPITAL, INC.

STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended September 30, 2001		Three Months Ended September 30, 2000			Nine Months Ended September 30, 2001			Nine Months Ended September 30, 2000
Interest Income:
	Fixed income securities	$	9,809,000	$	9,559,000		$	30,517,000		$	32,427,000
	Cash and cash equivalents		24,000		21,000			95,000			183,000
			9,833,000		9,580,000			30,612,000			32,610,000
Interest Expense			4,201,000		7,600,000			16,260,000			25,878,000
Net Interest Income			5,632,000		1,980,000			14,352,000			6,732,000
Dividend Income			162,000		185,000			656,000			909,000
Total Operating Income			5,794,000		2,165,000			15,008,000			7,641,000
General and Administrative Expenses:
	Management fee (Note 7)		88,000		124,000			260,000			427,000
	Other		279,000		556,000			676,000			1,017,000
			367,000		680,000			936,000			1,444,000
Operating Income, net of General and Administrative Expenses			5,427,000		1,485,000			14,072,000			6,197,000
Net Gain (Loss) from Investment Activities			2,409,000		(29,912,000	)		(4,431,000	)		(37,444,000	)
Reclassification of Previously Unrealized Gains (Note 2)			—		—			1,742,000			—
Net Income (Loss) Before Cumulative Effect of Change in Accounting Principle			7,836,000		(28,427,000	)		11,383,000			(31,247,000	)
Cumulative Effect of Change in Accounting Principle			—		—			(2,173,000	)		—
Net Income (Loss)		$	7,836,000	$	(28,427,000	)	$	9,210,000		$	(31,247,000	)
Net Income (Loss) Per Share Before Cumulative Effect of Change in Accounting Principle:
	Basic	$	1.36	$	(4.94	)	$	1.98		$	(5.43	)
	Diluted	$	1.34	$	(4.94	)	$	1.95		$	(5.43	)
Effect of Accounting Change Per Share:
	Basic	$	—	$	—		$	(0.38	)	$	—
	Diluted	$	—	$	—		$	(0.37	)	$	—
Net Income (Loss) Per Share:
	Basic	$	1.36	$	(4.94	)	$	1.60		$	(5.43	)
	Diluted	$	1.34	$	(4.94	)	$	1.58		$	(5.43	)
Weighted Average Number of Shares Outstanding:
	Basic		5,753,000		5,753,000			5,753,000			5,753,000
	Diluted		5,846,000		5,753,000			5,846,000			5,753,000
Dividends Declared Per Share		$	0.40	$	0.35		$	1.15		$	1.16

See accompanying notes to financial statements

F–24

APEX MORTGAGE CAPITAL, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, June 30 and September 30, 2001

(Unaudited)

										Accumulated Dividend Distributions in Excess of Net Income
		Common Stock					Accumulated Other Comprehensive Income (Loss)
					Additional Paid-in Capital								Comprehensive Income/(Loss)
		Shares	Amount													Total
Balance, December 31, 2000		5,753,000	$	58,000	$	82,800,000	($	1,079,000	)	($	37,396,000	)				$	44,383,000
Issuance of stock options to non-employees (Note 8)						1,000											1,000
Net income											974,000		$	974,000			974,000
Other comprehensive income:
	Cumulative effect of change in accounting principle (Note 2)							2,173,000						2,173,000			2,173,000
	Reclassification of previously unrealized gains							(1,742,000	)					(1,742,000	)		(1,742,000	)
	Change in unrealized gain on available-for-sale securities							2,450,000						2,450,000			2,450,000
	Cumulative effect of change in accounting principle—reclassification of deferred gain on terminated swaps							2,546,000						2,546,000			2,546,000
	Amortization of deferred gain on terminated swaps							(1,152,000	)					(1,152,000	)		(1,152,000	)
Comprehensive income													$	5,249,000
Dividends declared											(2,073,000	)					(2,073,000	)
Balance, March 31, 2001		5,753,000		58,000		82,801,000		3,196,000			(38,495,000	)					47,560,000
Issuance of stock options to non-employees (Note 8)						1,000											1,000
Net income											400,000		$	400,000			400,000
Other comprehensive income:
	Change in unrealized gain on available-for-sale securities							367,000						367,000			367,000
	Amortization of deferred gain on terminated swaps							(946,000	)					(946,000	)		(946,000	)
Comprehensive loss													$	(179,000	)
Dividends declared											(2,370,000	)					(2,370,000	)
Balance, June 30, 2001		5,753,000		58,000		82,802,000		2,617,000			(40,465,000	)					45,012,000
Issuance of stock options to non-employees (Note 8)						1,000											1,000
Additional paid-in-capital						28,000											28,000
Net income											7,836,000		$	7,836,000			7,836,000
Other comprehensive income:
	Change in unrealized gain on available-for-sale securities							2,087,000						2,087,000			2,087,000
	Amortization of deferred gain on terminated swaps							(145,000	)					(145,000	)		(145,000	)
Comprehensive income													$	9,778,000
Dividends declared											(2,369,000	)					(2,369,000	)
Balance, September 30, 2001		5,753,000	$	58,000	$	82,831,000	$	4,559,000		($	34,998,000	)				$	52,450,000

See accompanying notes to financial statements

F–25

APEX MORTGAGE CAPITAL, INC.

STATEMENTS OF CASH FLOWS
(Unaudited)

				Three Months Ended September 30, 2001			Three Months Ended September 30, 2000			Nine Months Ended September 30, 2001			Nine Months Ended September 30, 2000
Operating Activities:
	Net income (loss)			$	7,836,000		$	(28,427,000	)	$	9,210,000		$	(31,247,000	)
	Adjustments to reconcile net income to net cash provided by operating activities:
		Accretion of discount			(786,000	)		(849,000	)		(3,731,000	)		(1,280,000	)
		Net (gain) loss on investing activities			(2,409,000	)		29,912,000			4,431,000			37,444,000
		Cumulative effect of change in accounting principle			—			—			2,173,000			—
		Reclassification of previously unrealized gains			—			—			(1,742,000	)		—
		Change in assets and liabilities:
			Trading securities		16,279,000			—			59,088,000			—
			Accrued interest receivable		115,000			110,000			440,000			2,689,000
			Other assets		110,000			224,000			129,000			696,000
			Accrued interest payable		(73,000	)		130,000			(70,000	)		(2,768,000	)
			Accrued expenses and other liabilities		2,647,000			61,000			2,195,000			(307,000	)
			Net cash provided by operating activities		23,719,000			1,161,000			72,123,000			5,227,000
Investing Activities:
	Payments on closed forward contracts				—			(6,645,000	)		—			(13,107,000	)
	Proceeds from sales of equity securities available-for-sale				—			1,393,000			1,712,000			6,481,000
	Proceeds from sales of fixed income securities available-for-sale				—			—			—			96,513,000
	Proceeds from closed forward contracts				—			39,000			—			5,930,000
	Proceeds from terminating interest rate swaps				—			—			—			5,554,000
	Principal payments on fixed income securities available-for-sale				—			17,448,000			—			58,524,000
			Net cash provided by investing activities		—			12,235,000			1,712,000			159,895,000
Financing Activities:
	Net (repayments) on reverse repurchase agreements				(21,814,000	)		(14,656,000	)		(65,644,000	)		(160,125,000	)
	Dividend distributions				(2,446,000	)		(2,035,000	)		(6,515,000	)		(7,483,000	)
	Additional Paid In Capital				28,000			—			28,000			—
			Net cash used in financing activities		(24,232,000	)		(16,691,000	)		(72,131,000	)		(167,608,000	)
Net (Decrease) Increase in Cash and Cash Equivalents					(513,000	)		(3,295,000	)		1,704,000			(2,486,000	)
Cash and Cash Equivalents at Beginning of Period					2,357,000			3,414,000			140,000			2,605,000
Cash and Cash Equivalents at End of Period				$	1,844,000		$	119,000		$	1,844,000		$	119,000
Supplemental Disclosure of Cash Flow Information:
	Cash paid for interest			$	4,418,000		$	8,661,000		$	18,577,000		$	30,348,000
Noncash Investing and Financing Activities:
	Change in accumulated other comprehensive income			$	1,942,000		$	30,571,000		$	5,638,000		$	30,435,000
	Change in principal payments, not yet received			$	(127,000	)	$	—		$	161,000		$	3,537,000
	Change in securities purchased, not yet settled			$	354,000		$	—		$	(14,160,000	)	$	—
	Change in dividends declared, not yet paid			$	(77,000	)	$	(2,111,000	)	$	296,000		$	(2,724,000	)

See accompanying notes to financial statements

F–26

APEX MORTGAGE CAPITAL, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2001
(Unaudited)

Note 1—The Company

    Apex Mortgage Capital, Inc. (the "Company") was incorporated in Maryland on September 15, 1997. The Company commenced its operations of acquiring and managing a portfolio of mortgage assets on December 9, 1997, upon receipt of the net proceeds from the initial public offering of the Company's common stock. The Company uses its equity capital and borrowed funds to seek to generate income based on the difference between the yield on its investments and the cost of its borrowings. The Company is structured for tax purposes as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").

Note 2—Summary of Significant Accounting Policies

Basis of Presentation

    The accompanying financial statements of Apex Mortgage Capital, Inc. have been prepared in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Interim results are not necessarily indicative of results for a full year.

    Certain balances shown in prior period Balance Sheets and Statements of Operations have been reclassified to conform to the current period presentation for comparative purposes.

Cash and Cash Equivalents

    Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value.

Fixed Income Securities

    The Company's fixed income securities consist primarily of residential mortgage securities and other fixed income securities. All fixed income securities are recorded at cost on the date the assets are purchased. Realized gains and losses on sales of the securities are determined on an average cost basis. A majority of the Company's fixed income securities are expected to qualify as real estate assets under the REIT Provisions of the Code.

    Interest income on the Company's mortgage securities is accrued based on the actual coupon rate and the outstanding principal amount. Premiums and discounts are amortized into interest income over the lives of the securities using the effective yield method adjusted for the effects of estimated prepayments. When securities are deemed to be impaired, an impairment reserve is recorded. Such reserve is accounted for as an adjustment to the cost of the securities and is accreted into income on the same basis as the original discount.

    Interest income on the Company's other fixed income securities is accrued using the effective interest method applied prospectively based on current market assumptions.

    Beginning on January 1, 2001, the Company's policy is to generally classify its fixed income securities that are subject to a hedging strategy and are generally expected to experience a higher level of turnover as trading securities. These fixed income securities are reported at fair value with

F–27

unrealized gains and losses included in earnings each reporting period. Fixed income securities that are generally not subject to hedging and are expected to experience a lower level of turnover are classified as available-for-sale. These fixed income securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income.

Equity Securities

    The Company's equity securities consist primarily of equity securities issued by other real estate investment trusts.

    Dividend income on equity securities is recorded on the declaration date. Realized gains and losses on sales of the securities are determined on an average cost basis. A majority of the Company's equity securities are expected to qualify as real estate assets under the REIT Provisions of the Code.

    The Company's policy is to generally classify its equity securities as available-for-sale. Equity securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income.

Interest Rate Hedging Transactions

    The Company may enter into interest rate swap and interest rate cap agreements in order to mitigate the impact of rising interest rates on the cost of its short-term borrowings. The Company may also enter into forward contracts to sell U.S. Treasury notes in order to mitigate the negative impact of rising interest rates on the fair value of certain fixed income securities. Prior to December 31, 2000, unrealized gains and losses on open forwards were shown as assets and liabilities, respectively, and as accumulated other comprehensive income in the balance sheets. Realized gains and losses on terminated forwards were recorded as deferred gains and losses, included in accumulated other comprehensive income in the balance sheets and were amortized over the remaining lives of the fixed income securities being hedged as an adjustment to income in the statements of operations. Beginning on January 1, 2001, all realized and unrealized gains and losses on forward contracts are recognized in net gains and losses from trading activities in the statement of operations.

Stock Based Compensation

    The Company grants stock options to its directors and officers and to certain directors, officers and employees of its investment manager and the investment manager itself, as discussed in Note 8. Options granted to directors of the Company are accounted for using the intrinsic value method, and generally no compensation expense is recognized in the statements of operations for such options. Other options are accounted for using the fair value method; such options are measured at their fair value when they are granted and are recognized as a general and administrative expense during the periods when the options vest and the related services are performed.

Federal and State Income Taxes

    The Company has elected to be taxed as a REIT and generally is not subject to federal and state taxes on its income to the extent it distributes annually 90% of its predistribution taxable income to

F–28

stockholders and meets certain other asset, income and stock ownership tests. As such, no accrual for income taxes has been included in the financial statements.

Net Income Per Share

    Basic net income per share is calculated on the basis of the weighted average number of common shares outstanding during each period. Diluted net income per share includes the additional dilutive effect of common stock equivalents and outstanding stock options, and is calculated using the treasury stock method.

    570,000 stock options that could potentially dilute net income per share in the future were not included in the computation of diluted net income per share in 2000 because they would have been antidilutive for the period presented.

Income Recognition

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

Credit Risk

    The Company has limited its exposure to credit losses on its portfolio of fixed income securities by purchasing securities that are either rated "AAA" by at least one nationally recognized rating agency or are issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), Fannie Mae (formerly known as the Federal National Mortgage Corporation) or the Government National Mortgage Association ("GNMA"). The payment of principal and interest on the FHLMC, Fannie Mae and GNMA securities are guaranteed by those respective agencies. In addition, the Company has the ability to purchase up to 10% of the portfolio in below investment grade securities.

Use of Estimates

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

Recently Issued Accounting Standards

    The Company adopted SFAS No. 133 and the related amendments on January 1, 2001. This adoption resulted in a transition adjustment that reclassified $2,173,000 of net losses on unrealized and deferred gains and losses on investment securities and forward contracts from accumulated other comprehensive income to current income. Also, deferred gains on interest rate swaps previously designated as hedges were reclassified from other liabilities to accumulated other comprehensive income.

F–29

    In conjunction with the adoption of SFAS No. 133, the Company reclassified $594,469,000 of its mortgage securities from the available-for-sale category to the trading category for investments accounted for under SFAS No. 115. This change resulted in the reclassification of $1,742,000 net unrealized gains from accumulated other comprehensive income to current income, in addition to net unrealized gains included in the SFAS No. 133 transition adjustment discussed above.

    In 2001, the Company adopted the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but otherwise carries over most of the provisions of SFAS No. 125 without reconsideration. The adoption of SFAS No. 140 had no immediate effect on the results of operations, financial position or cash flows of the Company. The future effect, if any, will depend on whether the Company enters into any securitization transactions or other financial transactions to which SFAS No. 140 provisions may apply.

Note 3—Fixed Income and Equity Securities

    At September 30, 2001, fixed income and equity securities consisted of the following:

	Fixed Income Trading Securities			Fixed Income Securities Available-For-Sale			Equity Securities Available-For-Sale
	(in thousands)
Principal Amount	$	505,106		$	10,400		$	7,042
Unamortized Premium (Discount)		(9,829	)		(4,022	)		—
Adjusted Cost		495,277			6,378			7,042
Unrealized Gains		20,666			—			5,808
Unrealized Losses		(1	)		(656	)		(896	)
Fair Value	$	515,942		$	5,722		$	11,954

    At December 31, 2000, fixed income and equity securities available-for-sale consisted of the following:

	Adjustable Rate Mortgage Securities			Fixed Rate Mortgage Securities			Other Fixed Income Securities			Equity Securities
	(in thousands)
Principal Amount	$	39,253		$	557,962		$	10,400		$	8,690
Unamortized Premium (Discount)		978			(15,529	)		(3,712	)		—
Adjusted Cost		40,231			542,433			6,688			8,690
Unrealized Gains		46			11,783			—			1,091
Unrealized Losses		(24	)		—			(1,026	)		(713	)
Fair Value	$	40,253		$	554,216		$	5,662		$	9,068

F–30

    A portion of the other fixed income securities held as available-for-sale generally have an original maturity of five years subject to certain acceleration provisions. The expected average remaining maturity at September 30, 2001 and December 31, 2000 was approximately 1.2 and 2.0 years, respectively. The remaining portion of this category has a fixed remaining maturity of approximately 0.8 years as of September 30, 2001.

    During the quarter ended September 30, 2001, the Company reported a net gain on investment transactions of $2,409,000 which is included in the Statement of Operations. This gain consisted of $2,107,000 in gains on the sale of $130,456,000 of fixed income trading securities, $11,566,000 gain from the net increase in fair market value of fixed income trading securities, and $11,264,000 in net losses on closed forward contracts. For the quarter ended September 30, 2000, the Company reported a net loss on investment transactions of $29,912,000. The loss consisted of an impairment charge on certain fixed-rate mortgage securities that may be sold prior to maturity of $21,652,000, the recognition of the associated unrealized loss and deferred hedging losses on the impaired assets of $8,425,000, and $165,000 of net gains on the sale of $1,393,000 equity securities that were classified as available-for-sale.

    At September 30, 2001, the Company held equity securities and senior unsecured notes issued by Dynex Capital, Inc. ("Dynex") with fair market values of $5,774,000 and $4,500,000, respectively. During the year ended December 31, 1999, Dynex suspended the payment of dividends on its preferred stock. Accordingly, the Company is no longer recognizing dividend income on its equity investments in Dynex. Dynex is currently paying interest on its senior notes. Accordingly, the Company is recognizing interest income on the senior note investments issued by Dynex. If Dynex were to suspend payment of interest on its senior notes, interest income recognized by the Company would be negatively impacted.

Note 4—Reverse Repurchase Agreements

    The Company has entered into reverse repurchase agreements to finance certain of its investments. These agreements are secured by a portion of the Company's investments and bear interest rates that have historically moved in close relationship to LIBOR.

    At September 30, 2001, the Company had outstanding $479,790,000 of reverse repurchase agreements with a weighted average current borrowing rate of 2.99% and a maturity of 1.0 month. The reverse repurchase agreements were collateralized by securities with an estimated fair value of $500,783,000.

    At December 31, 2000, the Company had outstanding $545,434,000 of reverse repurchase agreements with a weighted average current borrowing rate of 6.61% and a maturity of 1.1 months. The reverse repurchase agreements were collateralized by securities with an estimated fair value of $564,274,000.

    For the quarter ended September 30, 2001, the average reverse repurchase agreement balance was $491,563,000 with a weighted average interest cost of 3.46%.

    For the year ended December 31, 2000, the average reverse repurchase agreement balance was $576,190,000 with a weighted average interest cost of 6.33%.

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Note 5—Fair Value of Financial Instruments

    The following table presents the amortized cost and estimated fair values of the Company's financial instruments. SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale (dollars in thousands):

		At September 30, 2001					At December 31, 2000
		Adjusted Cost		Fair Value			Adjusted Cost		Fair Value
Trading securities		$	495,277	$	515,942			—		—
Available-for-sale securities:
	Mortgage related securities available-for-sale		—		—		$	582,664	$	594,469
	Equity securities		7,042		11,954			8,690		9,068
	Other fixed income securities		6,378		5,722			6,688		5,662
	Forward contracts		—		(987	)		—		(3,731	)

    The Company bases its fair value estimates for mortgage-related securities, equity securities, other fixed income securities, and forward contracts primarily on third party price indications provided by dealers who make markets in these financial instruments when such indications are available. However, the fair value reported reflects estimates and may not necessarily be indicative of the amounts the Company could realize in a current market exchange. Cash and cash equivalents, interest receivable and reverse repurchase agreements are reflected in the financial statements at their costs, which approximates their fair values because of the short-term nature of these instruments.

Note 6—Stock Repurchase Program

    The Company's Board of Directors has authorized a program to repurchase shares of the Company's common stock. At September 30, 2001 and December 31, 2000, the Company was authorized to repurchase an additional 552,900 shares of the Company's common stock pursuant to the repurchase program.

Note 7—Transactions with Affiliates

    The Company has entered into a Management Agreement (the "Management Agreement"), as amended, with TCW Investment Management Company (the "Manager"), a wholly owned subsidiary of The TCW Group, Inc., under which the Manager will manage its day-to-day operations, subject to the direction and oversight of the Company's Board of Directors. The Company will pay the Manager annual base management compensation, payable monthly in arrears, equal to ³/4 of 1% of the average net invested capital as further defined in the Management Agreement.

    The Company recorded expenses of $88,000 and $124,000 in base management compensation to the Manager during the quarters ended September 30, 2001 and 2000, respectively.

    The accrued liability for base management compensation was $144,000 and $85,000 at September 30, 2001 and December 31, 2000, respectively.

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    The Company also pays the Manager, as incentive compensation, an amount equal to 30% of the Net Income of the Company, as defined in the Management Agreement, before incentive compensation, in excess of the amount that would produce an annualized return on equity equal to the ten-year US Treasury rate plus 1%, as further defined in the Management Agreement.

    The Company may also grant stock options to directors, officers and key employees of the Company, the Manager, its directors, officers and key employees (see Note 8).

    The Management Agreement may be renewed each year at the discretion of the Company's Board of Directors, unless previously terminated by the Company or the Manager upon written notice. Except in the case of a termination or non-renewal by the Company for cause, upon termination or non-renewal of the Management Agreement by the Company, the Company is obligated to pay the Manager a termination or non-renewal fee, which may be significant. The termination or non-renewal fee shall be equal to the fair market value of the Management Agreement without regard to the Company's termination right, as determined by an independent appraisal. Neither the fair market value of the Management Agreement nor the various factors that an appraiser may find relevant in its determination of the fair market value can be determined at this time. The fair market value of the Management Agreement will be affected by significant variables, including (i) the historical management fees paid to the Manager, (ii) any projections of future management fees to be paid to the Manager determined by the independent appraiser, (iii) the relative valuations of agreements similar to the Management Agreement and (iv) other factors, all of which may be unrelated to the performance of the Manager. Similar management agreements have been valued at as much as eight times the historical annual fees paid under such agreements. Any termination or non-renewal fee paid may be materially greater than eight times historical fees and the Company can provide no assurance at this time as to the amount of any such fee.

    The Company's other fixed income investments held as available-for-sale include securities that are issued by special purpose companies that invest primarily in mortgage-related assets. The Manager serves as the investment manager to these companies and is paid fees in connection with such services. The Company does not anticipate paying any management fees directly to the Manager in connection with these investments.

Note 8—Stock Options

    The Company has adopted a stock option plan (the "Amended and Restated 1997 Stock Option Plan") that provides for the grant of both qualified incentive stock options that meet the requirements of Section 422 of the Code, and non-qualified stock options, stock appreciation rights and dividend equivalent rights. Stock options may be granted to directors of the Company ("employees"), and to the Manager and the directors, officers and key employees of the Manager ("non-employees").

    The exercise price for any stock option granted under the Amended and Restated 1997 Stock Option Plan may not be less than 100% of the fair market value of the shares of common stock at the time the option is granted. Each option must terminate no more than ten years from the date it is granted. Subject to anti-dilution provisions for stock splits, stock dividends and similar events, the

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Amended and Restated 1997 Stock Option Plan authorizes the grant of options to purchase an aggregate of 1,000,000 shares of common stock.

    The Company recognized stock option expense relating to the options granted to the non-employees of $1,000 and $23,000 during the quarters ended September 30, 2001 and 2000, respectively.

    For stock options outstanding at September 30, 2001, the range of exercise prices is $6.98 to $15.00 per share and the weighted-average remaining contractual life is 7.44 years.

    For the year ended December 31, 2000, options to purchase 183,000 shares of the Company's common stock were granted to directors of the Company and options to purchase 125,000 shares were granted to officers of the Company and officers and key employees of the Manager. The exercise price of the options granted during 2000 was $6.98 per share. None of the options granted during 2000 include dividend equivalent rights.

    The fair value of each option granted during 2000 was estimated to be $0.04 as of the grant date using the Black-Scholes option pricing model with the following assumptions: dividend yield of 20% per annum; expected volatility of 30%; risk free interest rate of 5.22% per annum; and an expected life of 10 years.

    The options granted during 2000 expire in December 2010 and vest in two equal installments during the month of December in 2001 and 2002.

    For the year ended December 31, 1998, options to purchase 112,000 shares of the Company's common stock were granted to directors of the Company and options to purchase 58,000 shares were granted to officers of the Company and officers and key employees of the Manager. The exercise price of the options granted during 1998 was $10.38 per share. All of the options granted during 1998 include dividend equivalent rights that entitle the option holder to receive a cash payment equal to the dividends declared on the Company's common stock multiplied by the number of options held until the options are exercised or expire.

    The fair value of each option granted during 1998 was estimated to be $5.32 as of the grant date using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0% per annum (to account for the dividend equivalent rights); expected volatility of 30%; risk free interest rate of 4.57% per annum; and an expected life of 10 years.

    The options granted during 1998 expire in December 2008 and vested in two equal installments during the month of December in 1999 and 2000.

    For the year ended December 31, 1997, options to purchase 210,000 shares of the Company's common stock were granted to directors of the Company and options to purchase 190,000 shares were granted to officers of the Company and officers and key employees of the Manager. The exercise price of the options granted during 1997 was $15 per share.

    The fair value of each option granted during 1997 was estimated to be $1.05 as of the grant date using the Black-Scholes option pricing model with the following assumptions: dividend yield of 11% per

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annum; expected volatility of 30%; risk free interest rate of 5.82% per annum; and an expected life of 10 years.

    The options granted during 1997 expire in December 2007 and vested in three equal installments during the month of February in 1999, 2000 and 2001.

    If the Company had recorded stock option grants to Company directors at fair value and related compensation expense, the pro forma effect on the Company's net income (loss) and earnings (loss) per share would have been as follows:

	Quarter Ended September 30, 2001		Quarter Ended September 30, 2000
Net income (loss)—as reported	$	7,836,000	$	(28,427,000	)
Net income (loss)—pro forma	$	7,835,000	$	(28,450,000	)
Basic earnings (loss) per share—as reported	$	1.36	$	(4.94	)
Diluted earnings (loss) per share—as reported	$	1.34	$	(4.94	)
Basic earnings (loss) per share—pro forma	$	1.36	$	(4.95	)
Diluted earnings (loss) per share—pro forma	$	1.34	$	(4.95	)

    Information regarding stock option activity during the nine months ended September 30, 2001 is as follows:

	Shares	Weighted Average Exercise Price
Options Outstanding at January 1, 2001	878,000	$	11.29
Exercised	—		—
Expired	—		—
Options Outstanding at September 30, 2001	878,000	$	11.29

Note 9—Contractual Commitments

    The Company from time to time may enter into interest rate swap agreements in order to mitigate the impact of rising interest rates on the cost of its short-term borrowings. There were no interest rate swap agreements open at September 30, 2001 and December 31, 2000.

    During the year ended December 31, 2000, the Company terminated all outstanding interest rate swap agreements with a combined notional amount of $386,213,000 which resulted in a deferred gain of $5,554,000 that is being amortized over the remaining life of the original swap agreements. The deferred gain is included in accumulated other comprehensive income on the balance sheet and the amortization expense is included in interest expense in the statements of operations. During the quarter ended September 30, 2001, $145,000 of the deferred gain was amortized. Approximately 97% of the deferred gain will be amortized by December 31, 2001. The remaining deferred gain will be fully amortized by May 31, 2002.

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Note 10—Forward Contracts

    At September 30, 2001, the Company had open forward contracts to sell U.S. Treasury notes with terms stated below.

Current Notional Amount (000)		Average Termination Date	Net Unrealized Losses (000)			Average Maturity of Underlying Securities
$	288,000	10/22/2001	$	(987	)	4.23 Years

    At December 31, 2000, the Company had open forward contracts to sell U.S. Treasury notes with terms stated below.

Current Notional Amount (000)		Average Termination Date	Net Unrealized Losses (000)			Average Maturity of Underlying Securities
$	575,000	1/19/2001	$	(3,731	)	2.99 Years

    During the nine months ended September 30, 2001, a transition adjustment, in connection with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, was recorded to reclassify $2,173,000 from accumulated other comprehensive income to net loss on investment transactions on the statements of operations. This reclassification consists of $8,505,000 net deferred losses on closed forward contracts, $3,731,000 net unrealized losses on open forward contracts, and $10,063,000 net unrealized gains on securities hedged by open forward contracts at December 31, 2000. Also, during the nine months ended September 30, 2001, $22,518,000 of net loss was realized on closed forward contracts and is included in net loss from trading activities on the statements of operations.

Note 11—Adoption of Shareholder Rights Plan

    On June 30, 1999, the Board of Directors of the Company declared a dividend distribution of one Right for each outstanding share of Company Common Stock to stockholders of record at the close of business on July 30, 1999 (the "Record Date"). Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (the "Preferred Stock"), at a Purchase Price of $50, subject to adjustment. The description and terms of the Rights are set forth in a Shareholder Rights Agreement (the "Rights Agreement") between the Company and The Bank of New York, as Rights Agent.

    Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights Certificates will be distributed. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate from the Common Stock and a Distribution Date will occur upon the earlier of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date"), other than as a result of repurchases of stock by the Company or certain inadvertent actions by institutional or certain other stockholders or (ii) 10 business days (or such later date as the Board shall determine) following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person. Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only

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with such Common Stock certificates, (ii) new Common Stock certificates issued after the Record Date will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. Pursuant to the Rights Agreement, the Company reserves the right to require that, prior to the occurrence of a triggering event, upon any exercise of Rights, a number of Rights be exercised so that only whole shares of Preferred Stock will be issued.

    The Rights are not exercisable until the Distribution Date and will expire on July 30, 2009, unless earlier redeemed or exchanged by the Company.

Note 12—Subsequent Event

    During October 2001, the Company completed a secondary offering of 6.095 million shares of common stock at $10.00 per share. The size of the offering represented an increase over the 4.6 million shares reflected in the Company's initial registration statement. The aggregate net proceeds to the Company after deducting expenses were used to purchase mortgage related assets consistent with the Company's investment policy.

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PART II.  INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14.  Other Expenses of Issuance and Distribution

    The following table sets forth our costs and expenses in connection with the registration of our securities being registered. All amounts are estimates except the Securities and Exchange Commission registration fee, the American Stock Exchange fee and the National Association of Securities Dealers fee.

Description		Amount
Securities and Exchange Commission Registration Fee		$	8,174
American Stock Exchange Fee			17,500
National Association of Securities Dealers Fee			3,770
Printing and Engraving			100,000
Legal Fees and Expenses			125,000
Accountants' Fees and Expenses			25,000
Miscellaneous			5,556
	Total	$	285,000

ITEM 15.  Indemnification of Directors and Officers.

    Section 2-418 of the Maryland General Corporation Law permits us to indemnify, subject to the exceptions set forth therein, any director or officer of our company who is made a party to any proceeding by reason of service in that capacity to the company, or who is or was, serving as such with respect to another entity at the request of our company. The Maryland General Corporation Law also provides that we may purchase insurance on behalf of our directors, officers, employees or agents.

    Our charter and bylaws require us to provide for indemnification of our officers and directors substantially identical in scope to that permitted under Section 2-418 of the Maryland General Corporation Law. Our bylaws also provide that we must pay the expenses of our officers and directors (acting in their capacity as such) incurred in defending any action, suit or proceeding, whether civil, criminal, administrative or investigative, as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay all amounts so advanced if it is ultimately determined by a court of appropriate jurisdiction that the officer or director is not entitled to be indemnified by us.

    We have agreed to indemnify our directors and officers to the fullest extent permitted by applicable provisions of the Maryland General Corporation Law, provided that we approve any settlement of a third party action against a director or officer, and subject to limitations for actions initiated by the director or officer, penalties paid by insurance, and violations of Section 16(b) of the Exchange Act and similar laws.

    Our charter limits the liability of our directors and officers for money damages to our Company and our stockholders to the fullest extent permitted from time to time by Maryland law. Maryland law presently permits the liability of directors and officers to a corporation or its stockholders for money damages to be limited, except

•

to the extent that it is proved that the director or officer actually received an improper benefit or profit in money, property or services, or



•

if a judgment or other final adjudication adverse to the director or officer is entered in a proceeding based on a finding that the director's or officer's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding.

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This provision does not limit our ability or our stockholders' ability to obtain other relief, such as an injunction or rescission.

ITEM 16.  Exhibits.

    The following exhibits are part of this registration statement on Form S-2 and are numbered in accordance with Item 601 of Regulation S-K.

Exhibit No.		Description
1.1	*	Form of Underwriting Agreement between the Company and the underwriter.
4.1		Articles of Amendment and Restatement of the Company, as filed with the State Department of Assessments and Taxation of Maryland on November 25, 1997, (previously filed as Exhibit 3.1 to the Company's Registration Statement on Form S-11, Commission File No. 333-36069, Amendment No. 3, filed November 21, 1997 and incorporated herein by reference).
4.2		Articles Supplementary relating to the Company's Series A Junior Participating Preferred Stock, as filed with the State Department of Assessments and Taxation of the State of Maryland on July 26, 1999 (previously filed as Exhibit 3.1 to the Company's Current Report on Form 8-K, dated June 30, 1999 and filed July 23, 1999, and incorporated herein by reference).
4.3		Form of Share Certificate for our common stock (previously filed as Exhibit 4.3 to the Company's Current Report on Form 8-K, dated June 30, 1999 and filed July 27, 1999, and incorporated herein by reference).
4.4	*	Amended and Restated Bylaws of the Company.
4.5		Shareholder Rights Agreement between the Company and The Bank of New York, as Rights Agent (including as Exhibit B the form of Rights Certificate) (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated June 30, 1999 and filed July 27, 1999, and incorporated herein by reference).
5.1	*	Opinion of Ballard Spahr Andrews & Ingersoll, LLP as to legality of the shares being registered.
8.1	*	Opinion of O'Melveny & Myers LLP as to selected federal income tax matters.
10.1		Form of Management Agreement between the Company and TCW Investment Management Company (previously filed as Exhibit 10.1 to the Company's Registration Statement on Form S-11, Commission File No. 333-36069, Amendment No. 3, filed November 21, 1997 and incorporated herein by reference).
10.2		First Amendment to Management Agreement between the Company and TCW Investment Management Company dated December 16, 1998 (previously filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K405 for the year ended December 31, 1998, filed March 31, 1999, and incorporated herein by reference).
10.3		Second Amendment to Management Agreement between the Company and TCW Investment Management Company entered into as of December 16, 1999 (previously filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K405 for the year ended December 31, 1999, filed March 31, 2000, and incorporated herein by reference).
10.4		1997 Stock Option Plan, (previously filed as Exhibit 10.6 to the Company's Registration Statement on Form S-11, Commission File No. 333-36069, Amendment No. 3, filed November 21, 1997 and incorporated herein by reference).

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10.5		Amended and Restated 1997 Stock Option Plan, (previously filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K405 for the year ended December 31, 1998, filed March 31, 1999 and incorporated herein by reference).
23.1	*	Deloitte & Touche LLP's Independent Auditors' Consent.
23.2	*	Consent of Ballard Spahr Andrews & Ingersoll, LLP (included within the opinion filed as Exhibit 5.1).
23.3	*	Consent of O'Melveny & Myers LLP (included within the opinion filed as Exhibit 8.1).
24.1		Powers of Attorney (previously filed).

*

Filed herewith.

ITEM 17.  Undertakings

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

II–3

SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, Apex Mortgage Capital, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on November 27, 2001.

APEX MORTGAGE CAPITAL, INC.
By:	/s/ PHILIP A. BARACH    Philip A. Barach     President and Chief Executive Officer

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

Signature	Title	Date
/s/ PHILIP A. BARACH Philip A. Barach	President, Chief Executive Officer and Director	November 27, 2001
* Jeffrey E. Gundlach	Chief Investment Officer and Vice Chairman of the Board of Directors
* David S. DeVito	Interim Chief Financial Officer and Controller
* Marc I. Stern	Chairman of the Board of Directors
* Peter G. Allen	Director
* John C. Argue	Director
* John A. Gavin	Director
* Carl C. Gregory, III	Director

*By:	/s/ PHILIP A. BARACH
	Philip A. Barach Attorney-in-Fact	November 27, 2001

S–1

EXHIBIT INDEX

Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index immediately precedes the exhibits.

Exhibit No.		Description
1.1	*	Form of Underwriting Agreement between the Company and the underwriter.
4.1		Articles of Amendment and Restatement of the Company, as filed with the State Department of Assessments and Taxation of Maryland on November 25, 1997, (previously filed as Exhibit 3.1 to the Company's Registration Statement on Form S-11, Commission File No. 333-36069, Amendment No. 3, filed November 21, 1997 and incorporated herein by reference).
4.2		Articles Supplementary relating to the Company's Series A Junior Participating Preferred Stock, as filed with the State Department of Assessments and Taxation of the State of Maryland on July 26, 1999 (previously filed as Exhibit 3.1 to the Company's Current Report on Form 8-K, dated June 30, 1999 and filed July 23, 1999, and incorporated herein by reference).
4.3		Form of Share Certificate for our common stock (previously filed as Exhibit 4.3 to the Company's Current Report on Form 8-K, dated June 30, 1999 and filed July 27, 1999, and incorporated herein by reference).
4.4	*	Amended and Restated Bylaws of the Company.
4.5		Shareholder Rights Agreement between the Company and The Bank of New York, as Rights Agent (including as Exhibit B the form of Rights Certificate) (previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated June 30, 1999 and filed July 27, 1999, and incorporated herein by reference).
5.1	*	Opinion of Ballard Spahr Andrews & Ingersoll, LLP as to legality of the shares being registered.
8.1	*	Opinion of O'Melveny & Myers LLP as to selected federal income tax matters.
10.1		Form of Management Agreement between the Company and TCW Investment Management Company (previously filed as Exhibit 10.1 to the Company's Registration Statement on Form S-11, Commission File No. 333-36069, Amendment No. 3, filed November 21, 1997 and incorporated herein by reference).
10.2		First Amendment to Management Agreement between the Company and TCW Investment Management Company dated December 16, 1998 (previously filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K405 for the year ended December 31, 1998, filed March 31, 1999, and incorporated herein by reference).
10.3		Second Amendment to Management Agreement between the Company and TCW Investment Management Company entered into as of December 16, 1999 (previously filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K405 for the year ended December 31, 1999, filed March 31, 2000, and incorporated herein by reference).
10.4		1997 Stock Option Plan, (previously filed as Exhibit 10.6 to the Company's Registration Statement on Form S-11, Commission File No. 333-36069, Amendment No. 3, filed November 21, 1997 and incorporated herein by reference).
10.5		Amended and Restated 1997 Stock Option Plan, (previously filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K405 for the year ended December 31, 1998, filed March 31, 1999 and incorporated herein by reference).

23.1		Deloitte & Touche LLP's Independent Auditors' Consent.
23.2	*	Consent of Ballard Spahr Andrews & Ingersoll, LLP (included within the opinion filed as Exhibit 5.1).
23.3	*	Consent of O'Melveny & Myers LLP (included within the opinion filed as Exhibit 8.1).
24.1		Powers of Attorney (previously filed).

*

Filed herewith.

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TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
PROSPECTUS SUMMARY
Our Business
The Offering
Summary Financial Data
RISK FACTORS
Risks Related to our Business
Risks Related to Conflicts of Interest
Risks Related to REIT Compliance and Other Matters
Risks Related to Our Securities and Other Matters
USE OF PROCEEDS
MARKET PRICE AND DIVIDENDS ON OUR COMMON STOCK
CAPITALIZATION
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUR COMPANY
DESCRIPTION OF SECURITIES
MATERIAL CHANGES
FEDERAL INCOME TAX CONSIDERATIONS
SELECTED PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS
UNDERWRITING
EXPERTS
LEGAL MATTERS
WHERE YOU CAN FIND MORE INFORMATION
INFORMATION INCORPORATED BY REFERENCE
APEX MORTGAGE CAPITAL, INC. INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
APEX MORTGAGE CAPITAL, INC. BALANCE SHEETS
APEX MORTGAGE CAPITAL, INC. STATEMENTS OF OPERATIONS
APEX MORTGAGE CAPITAL, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
APEX MORTGAGE CAPITAL, INC. STATEMENTS OF CASH FLOWS
APEX MORTGAGE CAPITAL, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2000
APEX MORTGAGE CAPITAL, INC. BALANCE SHEETS (Unaudited)
APEX MORTGAGE CAPITAL, INC. STATEMENTS OF OPERATIONS (Unaudited)
APEX MORTGAGE CAPITAL, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Three Months Ended March 31, June 30 and September 30, 2001 (Unaudited)
APEX MORTGAGE CAPITAL, INC. STATEMENTS OF CASH FLOWS (Unaudited)
APEX MORTGAGE CAPITAL, INC. NOTES TO FINANCIAL STATEMENTS September 30, 2001 (Unaudited)
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
SIGNATURES
EXHIBIT INDEX

EX-1.1

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Exhibit 1.1

Apex Mortgage Capital, Inc.
2,700,000 Shares of Common Stock

FORM OF UNDERWRITING AGREEMENT

JOLSON MERCHANT PARTNERS, INC.
One Embarcadero Center, Suite 2100
San Francisco, California 94111

Ladies and Gentlemen:

    Apex Mortgage Capital, Inc., a Maryland corporation (the "Company"), confirms its agreement with Jolson Merchant Partners, Inc. (the "Underwriter") with respect to (i) the sale by the Company of 2,700,000 shares of common stock, par value $.01 per share, of the Company ("Common Stock"), and the purchase by the Underwriter of 2,700,000 shares of Common Stock, and (ii) the grant of the option described in Section 1(b) hereof to purchase all or any part of 405,000 additional shares of Common Stock to cover over-allotments, if any, from the Company to the Underwriter. The 2,700,000 shares of Common Stock to be purchased by the Underwriter (the "Initial Shares") and all or any part of the 405,000 shares of Common Stock subject to the option described in Section l(b) hereof (the "Option Shares") are hereinafter called, collectively, the "Shares."

    The Company understands that the Underwriter proposes to make a public offering of the Shares as soon as the Underwriter deems advisable after this Underwriting Agreement (this "Agreement") has been executed and delivered.

    The Company has filed with the Securities and Exchange Commission (the "Commission"), a registration statement on Form S-2 (No. 333-      ) and a related preliminary prospectus for the registration of the Shares under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations thereunder (the "Securities Act Regulations"). The Company has prepared and filed such amendments thereto, if any, and such amended preliminary prospectuses, if any, as may have been required by the Commission on or before the date hereof, and will file such additional amendments thereto and such amended prospectuses as may hereafter be required by the Commission. The registration statement as amended at the time it became effective (including all information deemed (whether by incorporation by reference or otherwise) to be a part of the registration statement at the time it became effective pursuant to the Securities Act and the Securities Act Regulations) is hereinafter called the "Registration Statement," except that, if the Company files a post-effective amendment to such Registration Statement which becomes effective prior to the Closing Time (as defined below), the term "Registration Statement" shall refer to such Registration Statement as so amended. Any registration statement filed pursuant to Rule 462(b) of the Securities Act Regulations is hereinafter called the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the 462(b) Registration Statement. The Registration Statement has been declared effective under the Securities Act and the Securities Act Regulations by the Commission. Each prospectus included in the Registration Statement, or amendments thereof or supplements thereto, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company in connection with the offering of the Shares with the consent of the Underwriter pursuant to Rule 424(a) of the Securities Act Regulations is hereinafter called the "Preliminary Prospectus." The term "Prospectus" means the final prospectus, as first filed with the Commission by the Company in connection with the offering of the Shares pursuant to paragraph (1) or (4) of Rule 424(b) of the Securities Act Regulations, and any amendments thereof or supplements thereto.

    The Company and the Underwriter agree as follows:

    1.  Sale and Purchase:

    (a)  Initial Shares.  Upon the basis of the warranties and representations and other terms and conditions herein set forth, at the purchase price per share of $      for each Initial Share, the Company agrees to sell to the Underwriter and the Underwriter agrees to purchase from the Company 2,700,000 Initial Shares.

    (b)  Option Shares.  In addition, upon the basis of the warranties and representations and other terms and conditions herein set forth, at the purchase price per share set forth in paragraph (a), the Company hereby grants to the Underwriter an option to purchase up to 405,000 Option Shares. The option hereby granted will expire 30 days after the date hereof and may be exercised one time in whole or in part only for the purpose of covering over-allotments, which may be made in connection with the offering and distribution of the Initial Shares, upon notice by the Underwriter to the Company setting forth the number of Option Shares as to which the Underwriter is exercising the option and the time and date of payment and delivery for such Option Shares. Any such time and date of delivery (the "Date of Delivery") shall be determined by the Underwriter, but shall not be later than five full business days (or earlier, without the written consent of the Company, than three full business days) after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined.

    2.  Payment and Delivery:

    (a)  Initial Shares.  The Initial Shares to be purchased by the Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as the Underwriter may request upon at least forty-eight hours' prior notice to the Company shall be delivered by or on behalf of the Company to the Underwriter, including, at the option of the Underwriter, through the facilities of The Depository Trust Company ("DTC") for the account of the Underwriter, against receipt by the Company of payment by or on behalf of the Underwriter of the purchase price therefor by wire transfer of immediately available funds to the account specified to the Underwriter by the Company upon at least forty-eight hours' prior notice. The Company shall cause the certificates representing the Initial Shares to be made available for checking and packaging at least twenty-four hours prior to the Closing Time (as defined below) with respect thereto at the offices of O'Melveny & Myers LLP, 275 Battery Street, Suite 2600, San Francisco, California 94111-3305, or at the office of DTC or its designated custodian, as the case may be (the "Designated Office"). The time and date of such delivery and payment shall be 9:30 a.m., New York City time, on [December 11], 2001 or on such other time and date as the Company and the Underwriter may agree upon in writing. The time at which such payment and delivery are actually made is hereinafter sometimes called the "Closing Time" and the date of delivery of either the Initial Shares or Option Shares is hereinafter sometimes called the "Date of Delivery."

    (b)  Option Shares.  Any Option Shares to be purchased by the Underwriter hereunder, in definitive form, and in such authorized denominations and registered in such names as the Underwriter may request upon at least forty-eight hours' prior notice to the Company shall be delivered by or on behalf of the Company to the Underwriter, including, at the option of the Underwriter, through the facilities of DTC for the account of the Underwriter, against receipt by the Company of payment by or on behalf of the Underwriter of the purchase price therefor by wire transfer of immediately available funds to the account specified to the Underwriter by the Company upon at least forty-eight hours' prior notice. The Company shall cause the certificates representing the Option Shares to be made available for checking and packaging at least twenty-four hours prior to the Date of Delivery with respect thereto at the Designated Office. The time and date of such delivery and payment shall be 9:30 a.m., New York City time, on the date specified by the Underwriter in the notice given by the Underwriter to the Company of the Underwriter's election to purchase such Option Shares or on such other time and date as the Company and the Underwriter may agree upon in writing.

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    3.  Representations and Warranties of the Company:  The Company represents and warrants to the Underwriter that:

    (a) the authorized shares of Common Stock of the Company conform in all material respects to the description thereof contained or incorporated by reference in the Registration Statement and Prospectus; the Company has an authorized, issued and outstanding capital stock is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization" as of the date stated in such section (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to agreements or benefit plans described or incorporated by reference in the Prospectus and pursuant to outstanding options); immediately after the Closing Time, 14,548,000 shares of Common Stock will be issued and outstanding (subject to the Underwriter's option described in Section 1(b) hereof) and no shares of any other class of capital stock will be issued and outstanding. All of the issued and outstanding shares of Common Stock of the Company have been duly authorized and are validly issued, fully paid and non-assessable, and have been offered, sold and issued by the Company in compliance in all material respects with all applicable laws (including, without limitation, federal and state securities laws); none of the issued shares of Common Stock of the Company have been issued in violation of any preemptive or similar rights granted by the Company; except those disclosed or incorporated by reference in the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any shares of Common Stock of the Company or any security convertible into or exchangeable for shares of Common Stock of the Company;

    (b) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland with the requisite corporate power and authority to own, lease and operate its properties and to conduct its business as now conducted and as described in the Registration Statement and the Prospectus and to authorize, execute and deliver this Agreement and to consummate the transactions contemplated hereby;

    (c) the Company is duly qualified or registered to transact business in each jurisdiction in which it conducts its businesses, except where the failure, individually or in the aggregate, to be so qualified or registered could not reasonably be expected to have a material adverse effect on the assets, business, operations, earnings, properties or condition (financial or otherwise) of the Company ("Material Adverse Effect"), and the Company is in good standing in each jurisdiction in which it owns or leases real property or maintains an office and in which such good standing is necessary, except where the failure to be in good standing could not reasonably be expected to have a Material Adverse Effect; the Company does not own, directly or indirectly, any significant subsidiaries, as defined in the Securities Act Regulations;

    (d) the Company is in compliance in all material respects with all applicable laws, rules, regulations, orders, decrees and judgments applicable to the Company;

    (e) the Company is not in breach of or in default under (nor has any event occurred which with notice, lapse of time, or both would constitute a breach of, or default under), its charter or bylaws, or in the performance or observance of any obligation, agreement, covenant or condition contained in any license, indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument to which the Company is a party or by which the Company or its properties is bound, except for such breaches or defaults which could not reasonably be expected to have a Material Adverse Effect, and the issuance, sale and delivery by the Company of the Shares, the execution, delivery and performance of this Agreement, and consummation of the transactions contemplated hereby will not conflict with, or result in any breach of, or constitute a default under (nor constitute any event which with notice, lapse of time, or both would constitute a breach of, or default under), (i) any provision of the charter or bylaws of the Company, or (ii) any provision of any license, indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument to which the Company is a party or by which the

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Company or its properties may be bound or affected, or (iii) any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company, except in each case for such conflicts, breaches or defaults which could not reasonably be expected to have a Material Adverse Effect;

    (f)  the Company has the corporate power and authority to enter into and perform this Agreement and to consummate the transactions contemplated hereby; this Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, by general principles of equity, and by federal or state securities laws and public policy considerations in respect thereof;

    (g) the issuance and sale of the Shares to the Underwriter hereunder has been duly authorized by the Company; when issued and delivered against payment therefor as provided in this Agreement, the Shares will be validly issued, fully paid and non-assessable and the issuance of the Shares will not be subject to any preemptive or similar rights; except as contemplated herein, no person or entity holds a right to require or participate in the registration under the Securities Act of the Shares pursuant to the Registration Statement; no person or entity has a right of participation or first refusal with respect to the sale of the Shares by the Company; there are no contracts, agreements or understandings between the Company and any person or entity granting such person or entity the rights to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement; the form of certificates evidencing the Shares complies in all material respects with all applicable laws and in all material respects with all applicable requirements of the charter and bylaws of the Company and the requirements of the American Stock Exchange;

    (h) no approval, authorization, consent or order of or filing with any federal, state or local governmental or regulatory commission, board, body, authority or agency is required in connection with the Company's execution, delivery and performance of this Agreement, its consummation of the transactions contemplated hereby, or its sale and delivery of the Shares as contemplated hereby, other than (i) such as have been obtained, or will have been obtained on or before the Closing Time or the relevant Date of Delivery, as the case may be, under the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder (the "Exchange Act Regulations"), (ii) such approvals as have been obtained in connection with the approval of the listing of the Shares on the American Stock Exchange, (iii) any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriter, and (iv) any necessary approvals by the National Association of Securities Dealers (the "NASD");

    (i)  the Company has the necessary licenses, authorizations, consents and approvals and has made the necessary filings required under any federal, state or local law, regulation or rule, and has obtained the necessary authorizations, consents and approvals from other persons required in order to conduct its business as described in the Registration Statement and Prospectus except where the failure to obtain such licenses, authorizations, consents and approvals or make such filings could not reasonably be expected to have a Material Adverse Effect; the Company is not in violation of, in default under, or has received any notice regarding a possible violation, default or revocation of any such license, authorization, consent or approval or any federal, state, local or foreign law, regulation or rule or any decree, order or judgment applicable to the Company except where such violation, default or revocation could not reasonably be expected to have a Material Adverse Effect;

    (j)  each of the Registration Statement and any Rule 462(b) Registration Statement has been declared effective by the Commission under the Securities Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued

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by the Commission under the Securities Act and no proceedings for that purpose have been instituted and are pending or, to the knowledge of the Company, are threatened by the Commission, and any request on the part of the Commission for additional information has been complied with to the reasonable satisfaction of the Commission;

    (k) the Company and the transactions contemplated by this Agreement satisfy the requirements and conditions for using a registration statement on Form S-2 under the Securities Act and the Securities Act Regulations, as set forth in the General Instructions to Form S-2; except for the information and documents required to be delivered with the Registration Statement, the Preliminary Prospectus and the Prospectus, the Registration Statement and the Preliminary Prospectus comply and the Prospectus and any further amendments or supplements thereto will comply, when they have become effective or are filed with the Commission, as the case may be, in all material respects with the requirements of the Securities Act and the Securities Act Regulations and, in each case, present or incorporate by reference or will present or will incorporate by reference, fairly the information required to be presented; the Registration Statement did not, and any amendment thereto will not, in each case as of the applicable effective date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company makes no warranty or representation with respect to any statement contained in the Registration Statement, the Preliminary Prospectus or the Prospectus in reliance upon and in conformity with the information furnished in writing by or on behalf of the Underwriter to the Company expressly for use in the Registration Statement, the Preliminary Prospectus or the Prospectus (that information being limited to that described in the last sentence of the first paragraph of Section 8(c) hereof); and the Preliminary Prospectus does not, and the Prospectus or any amendment or supplement thereto will not, as of the applicable filing date and at the Closing Time and on each Date of Delivery (if any), contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no warranty or representation with respect to any statement contained in the Registration Statement, the Preliminary Prospectus or the Prospectus in reliance upon and in conformity with the information and furnished in writing by or on behalf of the Underwriter to the Company expressly for use in the Registration Statement, the Preliminary Prospectus or the Prospectus (that information being limited to that described in the last sentence of the first paragraph of Section 8(c) hereof);

    (l)  each document incorporated by reference in the Prospectus, when it became effective or was filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Securities Act or the Exchange Act, as applicable, and the Securities Act Regulations and the Exchange Act Regulations, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;

    (m) the Preliminary Prospectus was and the Prospectus delivered to the Underwriter for use in connection with this offering will be substantially similar to the versions of the Preliminary Prospectus and Prospectus transmitted to the Commission for filing via the Electronic Data Gathering Analysis and Retrieval System ("EDGAR"), as permitted by Regulation S-T;

    (n) there are no actions, suits, proceedings, inquiries or investigations pending or, to the knowledge of the Company, threatened against the Company or to which the properties, assets or rights of the Company are subject, at law or in equity, before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority, arbitration panel or agency which could reasonably be expected to result in a Material Adverse Effect and which could materially affect the consummation of the transactions contemplated by this Agreement;

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    (o) the financial statements, including the notes thereto, included as part of the Registration Statement and the Prospectus or incorporated therein by reference, present fairly the financial position of the Company as of the dates indicated and the results of operations and changes in financial position and cash flows of the Company for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles as applied in the United States and on a consistent basis during the periods involved (except as indicated in the notes thereto); the financial statement schedules included in the Registration Statement and the Prospectus fairly present the information shown therein; except for the information and the documents required to be delivered with the Registration Statement, the Preliminary Prospectus and the Prospectus, no other financial statements or schedules are required by Form S-2 or otherwise to be included in the Registration Statement or Prospectus;

    (p) Deloitte & Touche, LLP whose reports on the financial statements of the Company are included as part of the Registration Statement and Prospectus or are incorporated therein by reference, are and were during the periods covered by their reports independent public accountants as required by the Securities Act and the Securities Act Regulations;

    (q) subsequent to the respective dates as of which information is given in the Registration Statement and the Preliminary Prospectus, and except as may be otherwise indicated in the Registration Statement or Preliminary Prospectus, there has not been (i) a Material Adverse Effect, whether or not arising in the ordinary course of business, (ii) any transaction, entered into by the Company which is material to the Company, (iii) any obligation, contingent or otherwise incurred by the Company, which is material to the Company or (iv) any dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock;

    (r) to the knowledge of the Company, the Company is not in breach of, or default under (nor has any event occurred which with notice, lapse of time, or both would constitute a breach of, or default under), the management agreement dated December 9, 1997, as amended (the "Management Agreement") between the Company and TCW Investment Management Company (the "Manager"), except where such breaches or defaults could not reasonably be expected to have a Material Adverse Effect;

    (s) other than the executive officers named in the Registration Statement, the Company has no employees and does not own or lease any real property;

    (t)  each of the Company and, to its knowledge, its officers, directors and controlling persons has not taken, and will not take any action which is designed to or which constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares;

    (u) the Company has not relied upon the Underwriter or counsel for the Underwriter for any legal, tax or accounting advice in connection with the offering and sale of the Shares other than with respect to the NASD and the blue sky laws;

    (v) any certificate signed by any officer of the Company, which is designated as a "Certificate," references this section and is delivered to the Underwriter or to counsel for the Underwriter pursuant to or in connection with this Agreement shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby;

    (w) the Company has good title to all personal property owned by it, free and clear of all liens, security interests, pledges, charges, encumbrances, mortgages and defects, except such as are disclosed or incorporated by reference in the Registration Statement, the Preliminary Prospectus or the Prospectus or such as do not materially and adversely affect the value of such property or do not interfere with the use made or proposed to be made of such property by the Company or could not reasonably be expected to result in a Material Adverse Effect;

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    (x) the descriptions incorporated by reference in the Registration Statement and the Preliminary Prospectus of the contracts, leases and other legal documents therein described present fairly the information required to be shown, and there are no contracts, leases, or other documents of a character required to be described in the Registration Statement or the Preliminary Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required or incorporated by reference as permitted;

    (y) to its knowledge, the Company owns or possesses adequate license or other rights to use all patents, trademarks, service marks, trade names, copyrights, software and design licenses, trade secrets, manufacturing processes, other intangible property rights and know-how (collectively "Intangibles") necessary to entitle the Company to conduct its business as described in the Prospectus, and other than as disclosed to the Underwriter respecting the Company's name, the Company has not received notice of infringement of or, to its knowledge, conflict with the asserted rights of others with respect to any Intangibles except as could not reasonably be expected to result in a Material Adverse Effect;

    (z) the Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability;

    (aa) the Company has filed on a timely basis all necessary federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof and has paid all taxes shown as due thereon; and, to its knowledge, no tax deficiency has been asserted against the Company, nor does the Company know of any tax deficiency which is likely to be asserted against it which if determined adversely to the Company, could reasonably be expected to have a Material Adverse Effect;

    (bb) the Company maintains insurance (issued by insurers of recognized financial responsibility) of the types and in the amounts generally deemed adequate for its business and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect;

    (cc) except as otherwise disclosed or incorporated by reference in the Registration Statement or the Preliminary Prospectus, there are no other material outstanding loans or advances or material guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, which are required to be disclosed in the Preliminary Prospectus;

    (dd) the Shares have been approved for listing, upon official notice of issuance, on the American Stock Exchange;

    (ee) in connection with the offering of Shares, the Company has not offered and will not offer its Common Stock or any other securities convertible into or exchangeable or exercisable for Common Stock in a manner in violation of the Securities Act or the Securities Act Regulations; other than the information and documents required or permitted to be distributed pursuant to the Securities Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations, the Company has not distributed and will not distribute any offering material in connection with the offer and sale of the Shares except as contemplated herein;

    (ff) the Company is organized and operates in conformity with the requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and the Company's proposed method of operation will enable it to satisfy the requirements for qualification as a real estate investment trust under the Code;

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    (gg) no relationship exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company on the other hand, which is required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement and the Prospectus and which is not so described or incorporated by reference; and

    (hh) the Company is not and, after giving effect to the offering and sale of the Shares, will not become an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act").

    4.  Certain Covenants:  The Company hereby agrees with the Underwriter:

    (a) to furnish the Underwriter such information as may be reasonably required and otherwise to cooperate in qualifying the Shares for offer and sale under the securities or blue sky laws of such states as the Underwriter may reasonably designate and to maintain such qualifications in effect as long as reasonably required for the distribution of the Shares, provided that the Company shall not be required to qualify as a foreign corporation or to consent to the service of process under the laws of any such state;

    (b) if, at the time this Agreement is executed and delivered, it is necessary for a post-effective amendment to the Registration Statement to be declared effective before the sale of the Shares may commence, the Company will endeavor to cause such post-effective amendment to become effective as soon as practicable and will advise the Underwriter promptly and, if requested by the Underwriter, will confirm such advice in writing, when such post-effective amendment has been declared effective by the Commission;

    (c) to prepare the Prospectus in a form reasonably approved by the Underwriter and file such Prospectus with the Commission pursuant to Rule 424(b) within the time period prescribed by the Securities Act Regulations and to furnish promptly (and with respect to the initial delivery of such Prospectus, not later than 10:00 a.m. (New York City time) on the second day following the execution and delivery of this Agreement) to the Underwriter as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriter may reasonably request for the purposes contemplated by the Securities Act Regulations, which Prospectus and any amendments or supplements thereto furnished to the Underwriter will be substantially similar to the version created to be transmitted to the Commission for filing via EDGAR, as permitted by Regulation S-T;

    (d) to advise the Underwriter promptly and (if requested by the Underwriter) to confirm such advice in writing, when the Registration Statement has been declared effective by the Commission and when any post-effective amendment thereto has been declared effective by the Commission under the Securities Act Regulations;

    (e) to advise the Underwriter immediately, confirming such advice in writing, of (i) the receipt of any comments from, or any request by, the Commission for amendments or supplements to the Registration Statement or Prospectus or for additional information with respect thereto, or (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or, to the knowledge of the Company, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or, to the knowledge of the Company, of the initiation or threatening of any proceedings for any of such purposes and, if the Commission or any other government agency or authority should issue to the Company any such order, to make every reasonable effort to obtain the lifting or removal of such order as soon as possible; to advise the Underwriter promptly of any proposal to amend or supplement the Registration Statement or Prospectus and, unless

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the Company determines it is required by applicable law, to file no such amendment or supplement to which the Underwriter shall reasonably object in writing;

    (f)  to file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the judgment of the Company or the Underwriter, be required by the Securities Act or requested by the Commission;

    (g) prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 of the Securities Act Regulations, to furnish a copy thereof to the Underwriter and counsel for the Underwriter and obtain the consent of the Underwriter to the filing, which consent shall not be unreasonably withheld or delayed;

    (h) to the extent consistent with Regulation FD (for purposes of this paragraph (h), the phrase "consistent with Regulation FD" means without obligating the Company to make similar disclosures to all of its stockholders or the public generally), to furnish to the Underwriter for a period of five years from the date of this Agreement (i) as soon as available, copies of all annual, quarterly and current reports or other communications supplied to holders of shares of Common Stock, (ii) as soon as practicable after the filing thereof, copies of all reports filed by the Company with the Commission, the NASD or the American Stock Exchange and (iii) such other publicly available information as the Underwriter may reasonably request regarding the Company;

    (i)  to the extent consistent with Regulation FD (for purposes of this paragraph (i), the phrase "consistent with Regulation FD" means without obligating the Company to make similar disclosures to all of its stockholders or the public generally), to advise the Underwriter promptly during any period of time in which a Prospectus relating to the Shares is required to be delivered under the Securities Act Regulations (i) of any material change in the Company's assets, operations, business or condition (financial or otherwise) or (ii) of the happening of any event which would require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, during such time, to prepare and furnish, at the Company's expense, to the Underwriter promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change and to furnish to the Underwriter a copy of such proposed amendment or supplement before filing any such amendment or supplement with the Commission;

    (j)  to furnish promptly to the Underwriter a signed copy of the Registration Statement, as initially filed with the Commission, and of all amendments or supplements thereto (including all exhibits filed therewith) and such number of conformed copies of the foregoing as the Underwriter may reasonably request;

    (k) to furnish to the Underwriter, not less than two business days before filing with the Commission, subsequent to the effective date of the Registration Statement and during the period of time in which a prospectus relating to the Shares is required to be delivered under the Securities Act Regulations, a copy of any document proposed to be filed with the Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act;

    (l)  to apply the net proceeds of the sale of the Shares in accordance with its statements under the caption "Use of Proceeds" in the Prospectus;

    (m) to use its commercially reasonable efforts to effect and maintain the listing of the Shares on the American Stock Exchange and to file with the American Stock Exchange all documents and notices required by the American Stock Exchange of companies that have securities that are listed on the American Stock Exchange;

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    (n) to engage and maintain, at its expense, a registrar and transfer agent for the Common Stock;

    (o) to materially comply with all of the provisions of any undertakings in the Registration Statement;

    (p) to use its reasonable efforts to meet the requirements for qualification as a real estate investment trust under Sections 856 through 860 of the Code;

    (q) to conduct its affairs in such a manner so as to ensure that the Company will not be an "investment company" or an entity "controlled" by an investment company within the meaning of the Investment Company Act;

    (r) to not itself and to use its reasonable efforts to cause its officers, directors and affiliates not to take, directly or indirectly prior to the distribution of the Shares, (i) any action designed to stabilize or manipulate the price of any security of the Company, or which may cause or result in, or which might in the future reasonably be expected to cause or result in, the stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of the Shares or (iii) pay or agree to pay to any person any compensation for soliciting any order to purchase any other securities of the Company; and

    (s) to maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles, and to maintain asset accountability.

    5.  Payment of Expenses:  The Company agrees to pay all costs and expenses incident to the performance of its obligations under this Agreement, including expenses and fees (other than the expenses and fees of the Underwriter and its counsel except as provided below) in connection with (i) the preparation and filing of the Registration Statement, each Preliminary Prospectus, the Prospectus, and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Underwriter and to dealers (including costs of mailing and shipment), (ii) the preparation, issuance and delivery of the certificates for the Shares to the Underwriter, including any stock or other transfer taxes or duties payable upon the sale of the Shares to the Underwriter, (iii) the printing of this Agreement and any dealer agreements and furnishing of copies of each to the Underwriter and to dealers (including costs of mailing and shipment), (iv) the qualification of the Shares for offering and sale under state laws that the Company and the Underwriter have mutually agreed are appropriate and the determination of their eligibility for investment under state law as aforesaid (including, for this aspect of the transaction, the legal fees and filing fees and other disbursements of counsel for the Underwriter) and the printing and furnishing of copies of any blue sky surveys or legal investment surveys to the Underwriter and to dealers, provided, however, that such fees shall not exceed $1,000, (v) filing for review of the public offering of the Shares by the NASD (including, for this aspect of the transaction, the legal fees and filing fees and other disbursements of counsel for the Underwriters relating thereto), provided, however, that such fees shall not exceed $2,000, (vi) the fees and expenses of any transfer agent or registrar for the Shares and miscellaneous expenses referred to in Part II of the Registration Statement, (vii) the Company's expenses incurred for lodging and travel of the Company's employees (provided that the parties shall use their reasonable efforts to utilize a commercial carrier) in making road show presentations with respect to the offering of the Shares, and (viii) the fees and expenses incurred by the Company in connection with the listing of the Shares on the American Stock Exchange.

    6.  Conditions of the Underwriter's Obligations:  The obligations of the Underwriter hereunder to purchase Shares at the Closing Time or on the Date of Delivery, as applicable, are subject to (i) the accuracy of the representations and warranties on the part of the Company in all material respects on

10

the date hereof and at the Closing Time and on each Date of Delivery, as applicable, (ii) the performance by the Company of its obligations hereunder in all material respects, and (iii) to the satisfaction of the following further conditions at the Closing Time or on the Date of Delivery, as applicable:

    (a) If, at the time this Agreement is executed and delivered, it is necessary for a post-effective amendment to the Registration Statement to be declared effective by the Commission before the offering of the Shares may commence, such post-effective amendment shall have been declared effective by the Commission not later than 5:30 p.m., New York City time, on the date hereof, or at such later date and time as shall be reasonably consented to in writing by the Underwriter, which consent shall not be unreasonably withheld or delayed;

    (b) The Underwriter shall have received at the Closing Time and on each Date of Delivery an opinion of O'Melveny & Myers LLP, counsel for the Company, addressed to the Underwriter and dated the Closing Time and each Date of Delivery and substantially in the form attached hereto as Exhibit C;

    (c) The Underwriter shall have received at the Closing Time and on each Date of Delivery an opinion of Ballard Spahr Andrews & Ingersoll, LLP, counsel for the Company, addressed to the Underwriter and dated the Closing Time and each Date of Delivery and substantially in the form attached hereto as Exhibit D;

    (d) The Underwriter shall have received at the Closing Time and on each Date of Delivery an opinion of O'Melveny & Myers LLP, tax counsel for the Company, addressed to the Underwriter and dated the Closing Time and each Date of Delivery and substantially in the form attached hereto as Exhibit E;

    (e) The Underwriter shall have received from Deloitte & Touche, LLP, letters dated, respectively, as of the date of this Agreement, the Closing Time and each Date of Delivery, as the case may be, addressed to the Underwriter, in form and substance reasonably satisfactory to the Underwriter, relating to the financial statements of the Company, and such other matters customarily covered by comfort letters issued in connection with registered public offerings of a similar nature;

    (f)  The Underwriter shall have received at the Closing Time and on each Date of Delivery the favorable opinion of Manatt, Phelps & Phillips, LLP, counsel to the Underwriter, dated the Closing Time or such Date of Delivery, addressed to the Underwriter and in form and substance satisfactory to the Underwriter;

    (g) No amendment or supplement to the Registration Statement or Prospectus shall have been filed to which the Underwriter shall have reasonably objected in writing;

    (h) Prior to the Closing Time and each Date of Delivery (i) no stop order suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of any Preliminary Prospectus or Prospectus has been issued and outstanding, and no proceedings for such purpose shall have been initiated or threatened by the Commission and remain unresolved, and no suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes, has occurred and remain unresolved, (ii) the Registration Statement shall not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;

    (i)  Between the time of execution of this Agreement and the Closing Time or the relevant Date of Delivery (i) no Material Adverse Effect of the Company shall occur or become known (whether or not arising in the ordinary course of business) or that makes it, in the reasonable judgment of the

11

Underwriter, impracticable to market the Shares in the manner contemplated in the Prospectus, or (ii) no transaction which is material and unfavorable to the Company shall have been entered into by the Company;

    (j)  At the Closing Time, the Shares shall have been approved for listing, upon official notice of issuance, on the American Stock Exchange;

    (k) The NASD shall not have raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements, which objection has not been resolved to the reasonable satisfaction of the NASD;

    (l)  The Underwriter shall have received lock-up agreements from each person listed on Schedule I attached hereto, substantially in the form of Exhibit A attached hereto, and such lock-up agreements shall be in full force and effect;

    (m) The Manager shall have furnished the Underwriter the letter agreement substantially in the form of Exhibit B attached hereto (the "Manager's Representation Letter") and the representations and warranties in the Manager's Representation Letter shall be accurate in all material respects as of the date hereof, the Closing Time and on each Date of Delivery;

    (n) The Company will, at the Closing Time and on each Date of Delivery, deliver to the Underwriter a certificate of two principal executive officers to the effect that, to each of such officer's knowledge, the representations and warranties of the Company set forth in this Agreement are true and correct in all material respects, the conditions set forth in paragraphs (i) and (k) have been satisfied in all material respects, and the Company has performed in all material respects its obligations under this Agreement, in each case as of such date;

    (o) The Company shall have furnished to the Underwriter such other documents and certificates as to the accuracy and completeness of any statement in the Registration Statement and the Prospectus, the representations, warranties and statements of the Company contained herein, the performance by the Company of its covenants contained herein, and the fulfillment of any conditions contained herein, as of the Closing Time or any Date of Delivery as the Underwriter may reasonably request; and

    (p) All filings with the Commission required by Rule 424 under the Securities Act Regulations shall have been made within the applicable time period proscribed for such filing by such Rule.

    7.  Termination:  The obligations of the Underwriter hereunder shall be subject to termination in the reasonable discretion of the Underwriter, at any time prior to the Closing Time or any Date of Delivery, (i) if any of the conditions specified in Section 6 shall not have been fulfilled in all material respects when and as required by this Agreement to be fulfilled, or (ii) if there has been since the respective dates as of which information is given in the Registration Statement, any Material Adverse Effect, whether or not arising in the ordinary course of business, or (iii) if there has occurred outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic, political or other conditions the effect of which on the financial markets of the United States is such as to make it, in the reasonable judgment of the Underwriter, impracticable to market the Shares or enforce contracts for the sale of the Shares, or (iv) if trading in any securities of the Company has been suspended by the Commission or by the American Stock Exchange, or if trading generally on the American Stock Exchange has been suspended (including automatic halt in trading pursuant to market-decline triggers other than those in which solely program trading is temporarily halted), or limitations on prices for trading (other than limitations on hours or numbers of days of trading) have been fixed, or maximum ranges for prices for securities have been required, by such exchange or the NASD or by order of the Commission or any other governmental authority, or (v) any federal or state statute, regulation, rule or order of any court or other governmental authority has been enacted, published, decreed or otherwise promulgated which in the reasonable opinion of the Underwriter materially

12

adversely affects or will materially adversely affect the business or operations of the Company, or (vi) any action has been taken by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the reasonable opinion of the Underwriter has a material adverse effect on the securities markets in the United States, or (vii) in the case of any of the events specified in clauses (i) through (vi), such event, singly or together with any other such events, makes it, in the judgment of the Underwriter, impracticable to market or deliver the Shares on the terms and in the manner contemplated in the Prospectus.

    If the Underwriter elects to terminate this Agreement as provided in this Section 7, the Company shall be notified promptly by telephone, promptly confirmed by facsimile.

    If the sale to the Underwriter of the Shares, as contemplated by this Agreement, is not carried out by the Underwriter for any reason permitted under this Agreement or if such sale is not carried out because the Company shall be unable to comply in all material respects with any of the terms of this Agreement, the Company shall not be under any obligation or liability under this Agreement and the Underwriter shall be under no obligation or liability to the Company under this Agreement or to one another hereunder.

    8.  Indemnity and Contribution by the Company and the Underwriter:

    (a) The Company agrees to indemnify, defend and hold harmless the Underwriter and any person who controls the Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any loss, expense, liability, damage or claim (including the reasonable cost of investigation) which the Underwriter or controlling person may incur under the Securities Act, the Exchange Act or otherwise, insofar as such loss, expense, liability, damage or claim arises out of or is based upon (i) any breach of any representation, warranty or covenant of the Company contained herein, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in such Registration Statement or necessary to make the statements made therein, not misleading, except insofar as any such loss, expense, liability, damage or claim arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Registration Statement and in conformity with information furnished in writing by the Underwriter to the Company expressly for use in such Registration Statement; or (iii) any untrue statement or alleged untrue statement of a material fact contained in a Prospectus (the term Prospectus for the purpose of this Section 8 being deemed to include any Preliminary Prospectus and the Prospectus as amended or supplemented by the Company), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in such Prospectus or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading, except insofar as any such loss, expense, liability, damage or claim arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such Prospectus and in conformity with information furnished in writing by the Underwriter to the Company expressly for use in such Prospectus.

    (b) If any action is brought against the Underwriter or controlling person in respect of which indemnity may be sought against the Company pursuant to Subsection 8(a) above, the Underwriter shall promptly notify the Company in writing of the institution of such action, and the Company shall assume the defense of such action, including the employment of counsel and payment of expenses; provided, however, that any failure or delay to so notify the Company will not relieve the Company of any obligation hereunder, to the extent that the Company is not materially prejudiced by such failure or delay. The Underwriter or controlling person shall have the right to employ its or their own outside legal counsel in any such case, but the fees and expenses of such outside legal counsel shall be at the expense of the Underwriter or such controlling person unless the employment of such outside legal

13

counsel shall have been authorized in writing by the Company in connection with the defense of such action, or the Company shall not have employed outside legal counsel to have charge of the defense of such action within a reasonable time or such indemnified party or parties shall have reasonably concluded (based on the advice of outside legal counsel) that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such reasonable out-of-pocket fees and expenses of outside legal counsel shall be borne by the Company and paid on a monthly basis as incurred (it being understood, however, that the Company shall not be liable for the expenses of more than one separate firm of outside attorneys for the Underwriter or controlling persons). Anything in this paragraph to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent, which shall not be unreasonably withheld.

    (c) The Underwriter agrees to indemnify, defend and hold harmless the Company, the Company's directors, the Company's officers that signed the Registration Statement, and any person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, expense, liability, damage or claim (including the reasonable cost of investigation) which, jointly or severally, the Company or any such person may incur under the Securities Act, the Exchange Act or otherwise, but only insofar as such loss, expense, liability, damage or claim arises out of or is based upon (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Company) and in conformity with information furnished in writing by the Underwriter to the Company expressly for use in the Registration Statement, or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or necessary to make such information not misleading; or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (the term Prospectus for the purpose of this Section 8 being deemed to include any Preliminary Prospectus and the Prospectus, as amended and supplemented) and in conformity with information furnished in writing by the Underwriter to the Company expressly for use in the Prospectus, or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in such Prospectus or necessary to make the statements therein, in the light of the circumstances under which made, not misleading. The statements set forth (i) in the last paragraph on the cover page of the Preliminary Prospectus and the Prospectus and (ii) under the caption "Underwriting" in the Preliminary Prospectus and the Prospectus (to the extent such statements relate to the Underwriter) constitute the only information furnished by or on behalf of the Underwriter to the Company expressly for use in the Registration Statement and the Prospectus and the Underwriter shall be deemed to have provided such information to the Company regardless of whether such statements were actually made or delivered by a party other than Jolson Merchant Partners, Inc. or its representatives.

    If any action is brought against the Company or any such person in respect of which indemnity may be sought against the Underwriter pursuant to the foregoing paragraph, the Company or such person shall promptly notify the Underwriter in writing of the institution of such action and the Underwriter shall assume the defense of such action, including the employment of counsel and payment of expenses. The Company or such person shall have the right to employ its own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Company or such person unless the employment of such counsel shall have been authorized in writing by the Underwriter in connection with the defense of such action or the Underwriter shall not have employed counsel to have charge of the defense of such action within a reasonable time or such indemnified party or parties shall have reasonably concluded (based on the advice of counsel) that there may be defenses available to it or them which are different from or additional to those available to the Underwriter (in which case the Underwriter shall not have the right to direct the defense of such

14

action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by such Underwriter and paid as incurred (it being understood, however, that the Underwriter shall not be liable for the expenses of more than one separate firm of attorneys in any one action or series of related actions in the same jurisdiction (other than local counsel in any such jurisdiction) representing the indemnified parties who are parties to such action). Anything in this paragraph to the contrary notwithstanding, the Underwriter shall not be liable for any settlement of any such claim or action effected without the written consent of the Underwriter, which consent shall not be unreasonably withheld or delayed.

    (d) If the indemnification provided for in this Section 8 is unavailable to an indemnified party under subsections (a), (b) and (c) of this Section 8 in respect of any losses, expenses, liabilities, damages or claims referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, expenses, liabilities, damages or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriter from the offering of the Shares or (ii) if (but only if) the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and of the Underwriter, on the other hand, in connection with the statements or omissions which resulted in such losses, expenses, liabilities, damages or claims, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriter, on the other hand, shall not be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company bear to the underwriting discounts and commissions received by the Underwriter. The relative fault of the Company, on the one hand, and of the Underwriter, on the other hand, shall be determined by reference to, among other things, which party had an opportunity to correct the untrue statement or alleged untrue statement of a material fact or omission or alleged omission and the parties' relative intent, knowledge and access to information. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any reasonable, out-of-pocket legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any claim or action.

    (e) The Company and the Underwriter agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation or by any other method of allocation which does not take account the equitable considerations referred to in Subsection 8(d)(i) and, if applicable 8(d)(ii), above. Notwithstanding the provisions of this Section 8, the Underwriter shall not be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by the Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

    9.  Survival:  The indemnity and contribution agreements contained in Section 8 and the covenants, warranties and representations of the Company contained in Sections 3, 4 and 5 of this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the Underwriter, or any person who controls the Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and shall survive any termination of this Agreement or the sale and delivery of the Shares. The Company and the Underwriter agree promptly to notify the other of the commencement of any litigation or proceeding against it and, in the case of the Company, against any of the Company's officers and directors, in connection with the sale and delivery of the Shares, or in connection with the Registration Statement or Prospectus.

    10.  Notices:  Except as otherwise herein provided, all statements, requests, notices and agreements shall be in writing or by telegram and, if to the Underwriter, shall be sufficient in all

15

respects if delivered to Jolson Merchant Partners, Inc., One Embarcadero Center, Suite 2100, San Francisco, California, 94111, Attention: Syndicate Department; if to the Company, shall be sufficient in all respects if delivered to the Company at the offices of the Company at 865 South Figueroa Street, Los Angeles, California 90017.

    11.  Governing Law; Headings:  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. The section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement.

    The parties in interest irrevocably submit to the exclusive jurisdiction of any United States federal court sitting in New York, New York in respect of any suit, action, or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby and hereby irrevocably agree that all claims in respect of any such suit, action or proceeding shall be held and determined in any such court. Each party hereto irrevocably waives any objection to the laying of venue of any such action, suit or proceeding in such court.

    12.  Parties in Interest:  The agreement herein set forth has been and is made solely for the benefit of the Underwriter, the Company and the controlling persons, directors and officers referred to in Sections 8 and 9 hereof, and their respective successors, assigns, executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from the Underwriter) shall acquire or have any right under or by virtue of this Agreement.

    13.  Counterparts and Facsimile Signatures:  This Agreement may be signed by the parties in counterparts which together shall constitute one and the same agreement among the parties. A facsimile signature shall constitute an original signature for all purposes.

    If the foregoing correctly sets forth the understanding between the Company and the Underwriter, please so indicate in the space provided below for the purpose, whereupon this Agreement shall constitute a binding agreement between the Company and the Underwriter.

	Very truly yours,
	APEX MORTGAGE CAPITAL, INC.
		By: Title:
Accepted and agreed to as of the date first above written:
JOLSON MERCHANT PARTNERS, INC.
By: Title:

16

Schedule I
Lock-Up Parties

Philip A. Barach
Jeffrey E. Gundlach
David S. DeVito
Joseph J. Galligan
Michael E. Cahill
Mark I. Stern
John C. Argue
Carl C. Gregory, III
Peter G. Allen
John A. Gavin

Schedule I–1

Exhibit A
Lock-Up Agreement

[Date]

Jolson Merchant Partners, Inc.
One Embarcadero Center, Suite 2100
San Francisco, California 94111

Re: Apex Mortgage Capital, Inc. (the "Company")

Ladies and Gentlemen:

    The undersigned is an owner of record or beneficially of certain shares of common stock of the Company ("Common Stock") or securities convertible into, exchangeable, or exercisable for Common Stock ("Securities"). The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the underwriter. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you are relying on the representations and agreements of the undersigned contained in this Lock-Up Agreement in carrying out the Offering and in entering into the Underwriting Agreement and the other underwriting arrangements with the Company with respect to the Offering.

    In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not, without the prior written consent of Jolson Merchant Partners, Inc. (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract, or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (collectively, the "Exchange Act") or otherwise dispose of any shares of Securities (collectively, a "Disposition") currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under the Exchange Act) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date 90 days after the date of the Prospectus (the "Lock-Up Period"). Notwithstanding the foregoing, the undersigned shall have the right to consummate the following during the Lock-Up Period or otherwise: (i) any transfer of all or part of the Securities as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by the terms of this Lock-Up Agreement; (ii) any transfer of all or part of the Securities to a trust the beneficiaries of which are exclusively the undersigned, a member or members of his or her immediate family and/or a charity, provided that the trust agrees in writing to be bound by the terms of this Lock-Up Agreement; (iii) any transfer of all or part of the Securities as a distribution to partners, shareholders or beneficiaries of such person, provided that the distributees thereof agree in writing to be bound by the terms of this Lock-Up Agreement; (iv) any transfer of Securities acquired on the open market; (v) any exercise of options to purchase shares of Common Stock, provided, however, that the Disposition of such shares of Common Stock shall be governed by the terms of this Lock-Up Agreement; and (vi) any transfer of all or part of the Securities with the prior written consent of Jolson Merchant Partners, Inc.

    Subject to clauses (i) through (vi) above, the foregoing restrictions have been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-Up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale, or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based

Exhibit A–1

market basket or index) that included, relates to, or derives any significant part of its value from Securities. Subject to clauses (i) through (vi) above, the undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common Stock or Securities held by the undersigned except in compliance with the foregoing restrictions.

    With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, of any Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering.

    This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. If the Underwriting Agreement is not executed and delivered by the Company and you on or before December 31, 2001, this Lock-Up Agreement shall be of no further force or effect. Nothing in this Lock-Up Agreement shall constitute an obligation to sell or purchase shares of Common Stock or Securities of the Company.

Printed Name of Holder
By:
	Signature
Printed Name of Person Signing

Exhibit A–2

Exhibit B
Manager's Representation Letter

    December      , 2001

JOLSON MERCHANT PARTNERS, INC.
One Embarcadero Center, Suite 2100
San Francisco, California 94111

Ladies and Gentlemen:

    In connection with that certain Underwriting Agreement, dated December      , 2001, (the "Underwriting Agreement," and all capitalized terms herein shall have the meanings ascribed to them in the Underwriting Agreement unless otherwise defined herein) by and between Apex Mortgage Capital, Inc., a Maryland corporation (the "Company"), and Jolson Merchant Partners, Inc. (the "Underwriter"), and for good and valuable consideration, the sufficiency of which is hereby acknowledged, TCW Investment Management Company (the "Management") represents and warrants the following to the Underwriter as of the date hereof:

    1.  The Manager has been duly incorporated and is validly existing and in good standing under the laws of the State of California with the requisite corporate power and authority to own, lease and operate its properties and to conduct its business as now conducted, and to perform its obligations under the Management Agreement.

    2.  The Manager is duly qualified or registered to transact business in each jurisdiction in which it conducts its business, except where the failure to be so qualified or registered could not reasonably be expected to have a Material Adverse Effect.

    3.  The Manager is not in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument to which the Manager is a party or by which it is bound or its properties are subject, except for such violations or defaults which could not be reasonably expected not to have a Material Adverse Effect.

    4.  The execution and delivery of the Management Agreement did not, and the performance of the Management Agreement and consummation of the transactions contemplated therein do not and will not conflict with or constitute a breach of, or default under or result in the creation or imposition of a lien, charge or encumbrance upon any property or asset of the Manager pursuant to any material contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Manager is a party or by which it is bound or its properties are subject, except for such conflicts, breaches or defaults, liens, charges or encumbrances which could not reasonably be expected to have a Material Adverse Effect, nor will such action result in any violation of the provisions of the charter or by-laws of the Manager, or any applicable law or any judgment, order, writ or decree of any government, governmental instrumentality or court having jurisdiction over the Manager or any of its properties or operations, except for such violations which could not reasonably be expected to have a Material Adverse Effect.

    5.  The Management Agreement was duly authorized, executed and delivered by the Manager and constitutes a valid and binding agreement of the Manager enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, by general principles of equity, and by federal or state securities laws and public policy considerations in respect thereof.

    6.  No filing with or authorization, approval, consent, license or order of any governmental authority or agency is required in connection with the performance by the Manager of its obligations under the Management Agreement.

Exhibit B–1

    7.  The information set forth under the captions "The Manager and Our Executive Officers," "Risks Related to Conflicts of Interest" and "Our Company—Overview" in the Preliminary Prospectus and the Prospectus (to the extent such statements relate to the Manager) (i) does not contain any untrue statement of a material fact or omit to state a material fact required to be stated in the Registration Statement, or necessary to make the statements made therein not misleading, and (ii) does not contain any untrue statement of a material fact required to be stated in the Preliminary Prospectus and the Prospectus or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

    The Manager possesses such licenses, approvals, consents and other authorizations issued by appropriate regulatory agencies or bodies necessary to conduct its business, except where the failure to possess such licenses, approvals, consents and other authorizations could not reasonably be expected to have a Material Adverse Effect. There is no action, suit, proceeding, inquiry or investigation pending or, to the Manager's knowledge, threatened against the Manager which if determined adversely to the Manager could reasonably be expected to result in a Material Adverse Effect and which could materially affect the consummation of the transactions contemplated by the Underwriting Agreement.

    The Manager is not prohibited by the Investment Advisers Act of 1940, as amended or the rules and regulations thereunder, from acting under the Management Agreement.

THIS REPRESENTATION LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. The parties hereto irrevocably submit to the exclusive jurisdiction of any United States federal sitting in New York, New York, in respect of any suit, action or proceeding arising out of or relating to this Representation Letter, and hereby irrevocably agree that all claims in respect of any such suit, action or proceeding shall be held and determined in any such court. Each of the parties hereto irrevocably waives any objection to the laying of the venue of any such suit, action or proceeding brought in any such court.

	TCW INVESTMENT MANAGEMENT COMPANY
	By:
		Name: Title:
Accepted and agreed to as of the date first written above:
JOLSON MERCHANT PARTNERS, INC.
Name: Title:

Exhibit B–2

Exhibit C
Legal Opinion Respecting Securities Law

    1.  The Company is duly qualified as a foreign corporation to do business in California, and the Company is in good standing in that State.

    2.  Other than as disclosed in the Prospectus, there are no subsidiaries of the Company.

    3.  The Company is not an "investment company" required to register under the Investment Company Act of 1940, as amended.

    4.  The execution and delivery of the Agreement by the Company do not, and the Company's performance of its obligations under the Agreement will not (i)  violate, breach, or result in a default under any existing obligation of or restriction on the Company under any other agreement listed as an exhibit to the Registration Statement and to which the Company is a party, or (ii) breach or otherwise violate any existing obligation of or restriction on the Company under any decree, judgment or order of any California or federal court or governmental authority binding on the Company and known to us to be applicable to the Company.

    5.  The execution and delivery of the Agreement by the Company do not, and the Company's performance of its obligations under the Agreement will not violate any current California or federal statute, rule or regulation that we have, in the exercise of customary professional diligence, recognized as applicable to the Company or to transactions of the type contemplated by the Agreement, except that, we express no opinion regarding any federal securities laws, or Blue Sky or state securities laws or the indemnification and contribution provisions set forth in Section 8 of the Agreement.

    6.  The Agreement constitutes the legally valid and binding obligation of the Company enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws), and by general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, and except as the enforceability of the indemnification and contribution provisions set forth in Section 8 of the Agreement may be limited by the federal or state securities laws of the United States or public policy underlying such laws.

    7.  No approval, consent or order of any federal or California governmental or regulatory authority that we have, in the exercise of customary professional diligence, recognized as applicable to the Company or to transactions of the type contemplated by the Agreement is required on the part of the Company for the execution and delivery of, and performance of its obligations under, the Agreement, except such as have been obtained under the Securities Act and such as may be required under applicable Blue Sky or state securities laws, and except that we express no opinion as to any necessary qualification under the Blue Sky or state securities laws of the various jurisdictions in which the Shares are being offered by the Underwriter or any approval of the underwriting terms and arrangements by the NASD.

    8.  Each of the Registration Statement and the Rule 462(b) Registration Statement, if any, has been declared effective under the Securities Act and, to our knowledge, no stop order suspending the effectiveness of the Registration Statement or the Rule 462(b) Registration Statement has been issued or threatened by the SEC.

    9.  The Registration Statement, including any Rule 462(b) Registration Statement, on the date that it was filed, appeared on its face to comply in all material respects with the requirements as to form for registration statements on Form S-2 under the Securities Act and the Securities Act

Exhibit C–1

Regulations, except that we express no opinion concerning the financial statements and other financial and statistical information contained or incorporated by reference therein;

    10. The Incorporated Documents, on the respective dates that they were filed, appeared on their face to comply in all material respects with the requirements as to form for reports on Form 10-K, Form 10-Q and Form 8-K, as the case may be, under the Exchange Act and the Exchange Act Regulations, except that we express no opinion concerning the financial statements and other financial and statistical information contained or incorporated by reference therein;

    11. To our knowledge, there are no contracts or other documents of a character required to be filed as an exhibit to the Registration Statement which are not filed as required.

    In connection with our participation in conferences in connection with the preparation of the Registration Statement and Prospectus, we have not independently verified the accuracy, completeness or fairness of the statements contained therein, and limitations inherent in the examination made by us and the knowledge available to us are such that we are unable to assume, and we do not assume, any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or Prospectus. However, on the basis of our review and participation in conferences in connection with the preparation of the Registration Statement and the Prospectus, we do not believe that (i) the Registration Statement, at the time the Registration Statement became effective, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) the Prospectus and the Incorporated Documents, considered as a whole on the date hereof, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. However, we express no opinion or belief as to any document filed by the Company under the Exchange Act whether before or after the effective date of the Registration Statement, except to the extent that any such document is an Incorporated Document read together with the Registration Statement or the Prospectus and considered as a whole, nor do we express any opinion or belief as to the financial statements and other financial and statistical information included or incorporated by reference in the Registration Statement, the Prospectus or the Incorporated Documents.

Exhibit C–2

Exhibit "D"

Legal Opinion Respecting Maryland Law

    1.  The authorized, issued and outstanding capital stock of the Company as of October 31, 2001, consisting of 11,848,000 shares of Common Stock, conform as to legal matters to the description thereof contained in the section of the Prospectus captioned "Description of Securities;" the Company has an authorized capitalization as set forth in the Prospectus under the caption "Capitalization" as of the date stated in such section; and the outstanding shares of capital stock of the Company, as of October 31, 2001, consisting of 11,848,000 shares of Common Stock, have been duly authorized and validly issued and are fully paid and non-assessable.

    2.  The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland with the requisite corporate power and authority to own its properties and to conduct its business as described in the Registration Statement and Prospectus and to execute and deliver this Agreement and to consummate the transactions described in this Agreement.

    3.  The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated by this Agreement do not and will not conflict with, or result in any breach of, or constitute a default under (nor constitute any event which with notice, lapse of time, or both would constitute a breach of, or default under) any provisions of the charter or bylaws of the Company or the Maryland General Corporation Law ("MGCL").

    4.  The execution and delivery by the Company of the Agreement have been duly authorized by all necessary corporate action required under the charter and bylaws of the Company and the MGCL; and the Agreement has been duly executed and, to our knowledge, delivered by the Company.

    5.  No approval, authorization, consent or order of or filing with any governmental or regulatory commission, board, body, authority or agency of the State of Maryland is required or necessary under any provisions of the MGCL in connection with the execution, delivery and performance of this Agreement, the consummation of the transaction contemplated hereby, or the sale and delivery of the Shares by the Company as contemplated hereby.

    6.  The Shares have been duly authorized for issuance and sale pursuant to this Agreement and when the Shares have been issued and duly delivered against payment therefore as contemplated by this Agreement, the Shares will be validly issued, fully paid and non-assessable.

    7.  The issuance and sale of the Shares by the Company is not subject to preemptive or other similar rights arising under the MGCL or the charter and bylaws of the Company.

    8.  The form of certificate used to evidence the Shares complies in all material respects with applicable statutory provisions of the MGCL and with any applicable requirements of the charter and bylaws of the Company.

    9.  The statements under the captions "Description of Securities" and "Selected Provisions of Maryland Law and Our Charter and Bylaws" in the Registration Statement and the Prospectus, insofar as such statements constitute a summary of Maryland corporate law and a description of the charter and bylaws of the Company, have been reviewed by us and are accurate in all material respects.

Exhibit D–1

Exhibit "E"

Legal Opinion Respecting Tax Matters

    1.  The Company has been organized and operated in conformity with the requirements for qualification as a real estate investment trust ("REIT") under the Code and the Treasury Regulations for its taxable years ended December 31, 1997 through December 31, 2000, and the Company's contemplated method of operations, as described in the Registration Statement, will enable it to satisfy the requirements for such qualification for its taxable year ending December 31, 2001, and each taxable year thereafter.

    2.  The section of the Registration Statement entitled "Federal Income Tax Considerations" identifies and fairly summarizes the material federal income tax considerations to a holder of Common Stock, and to the extent such summaries involve matters of law, such statements of law are correct in all material respects. However, such section is not exhaustive and does not purport to discuss any state or local tax considerations or all possible federal income tax considerations of the purchase, ownership, and disposition of Common Stock.

Exhibit E–1

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FORM OF UNDERWRITING AGREEMENT
Schedule I Lock-Up Parties
Exhibit A Lock-Up Agreement
Exhibit B Manager's Representation Letter
Exhibit C Legal Opinion Respecting Securities Law
Exhibit "D" Legal Opinion Respecting Maryland Law
Exhibit "E" Legal Opinion Respecting Tax Matters

EX-4.4

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Exhibit 4.4

Amended and Restated Bylaws
of
APEX MORTGAGE CAPITAL, INC.

TABLE OF CONTENTS

		Page
ARTICLE I		1
	Section 1. Principal Office	1
	Section 2. Additional Offices	1
	Section 3. Fiscal and Taxable Years	1
ARTICLE II		1
ARTICLE III		1
	Section 1. Place	1
	Section 2. Annual Meeting	1
	Section 3. Special Meetings	3
	Section 4. Notice	4
	Section 5. Organization	4
	Section 6. Quorum	4
	Section 7. Voting	5
	Section 8. Proxies	5
	Section 9. Voting of Shares by Certain Holders	5
	Section 10. Inspectors	5
	Section 11. Determination of Stockholders of Record	6
	Section 12. Action Without a Meeting	6
	Section 13. Voting by Ballot	6
	Section 14. Control Share Acquisition Statute	6
ARTICLE IV		6
	Section 1. General Powers	6
	Section 2. Number, Tenure and Qualifications	6
	Section 3. Changes in Number; Vacancies	7
	Section 4. Resignations	7
	Section 5. Removal of Directors	7
	Section 6. Annual and Regular Meetings	8
	Section 7. Special Meetings	8
	Section 8. Notice	8
	Section 9. Quorum	8
	Section 10. Voting	8
	Section 11. Telephone Meetings	9
	Section 12. Action Without a Meeting	9
	Section 13. Compensation	9
	Section 14. Policies and Resolutions	9
	Section 15. External Management	9
ARTICLE V		10
	Section 1. Committees of the Board	10
	Section 2. Telephone Meetings	11
	Section 3. Action By Committees Without a Meeting	11
ARTICLE VI		11
	Section 1. General Provisions	11
	Section 2. Subordinate Officers, Committees and Agents	12
	Section 3. Removal and Resignation	12
	Section 4. Vacancies	12
	Section 5. General Powers	12
	Section 6. Chief Executive Officer	12

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	Section 7. Chief Operating Officer	12
	Section 8. Chairman and Vice Chairman of the Board	12
	Section 9. President	12
	Section 10. Vice Presidents	13
	Section 11. Secretary	13
	Section 12. Chief Financial Officer or Treasurer	13
	Section 13. Assistant Secretaries and Assistant Treasurers	13
	Section 14. Salaries	13
ARTICLE VII		14
	Section 1. Contracts	14
	Section 2. Checks and Drafts	14
	Section 3. Deposits	14
	Section 4. Voting Securities Owned by the Corporation	14
ARTICLE VIII		14
	Section 1. Certificates of Shares	14
	Section 2. Lost Certificate	14
	Section 3. Transfer Agents and Registrars	14
	Section 4. Transfer of Shares	15
	Section 5. Share Ledger	15
ARTICLE IX		15
	Section 1. Declaration	15
	Section 2. Contingencies	15
ARTICLE X		15
	Section 1. Indemnification of Agents	15
	Section 2. Authority to Advance Expenses	16
	Section 3. Right of Claimant to Bring Suit	16
	Section 4. Insurance	16
	Section 5. Indemnification Non-Exclusive	16
	Section 6. Subrogation	16
	Section 7. No Duplication of Payments	16
	Section 8. Limitation of Liability	16
ARTICLE XI		17
	Section 1. Seal	17
	Section 2. Affixing Seal	17
ARTICLE XII		17
ARTICLE XIII		17

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ARTICLE I
Offices

Section 1. Principal Office. The principal office of Apex Mortgage Capital, Inc. (the "Corporation") shall be located at 865 South Figueroa Street, Suite 1800, Los Angeles, California 90017 or at any other place or places as the Board of Directors may designate.

Section 2. Additional Offices. The Corporation may have additional offices at such places as the Board of Directors may from time to time determine or the business of the Corporation may require.

Section 3. Fiscal and Taxable Years. The fiscal and taxable years of the Corporation shall begin on January 1 and end on December 31.

ARTICLE II
Definitions

    For purposes of these Amended and Restated Bylaws ("Bylaws"), the following words shall have the meanings set forth below:

    (a)  "Affiliate" of a person shall mean any person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with such person. The term "person" means and includes individuals, corporations, general and limited partnerships, stock companies, land trusts, business trusts or other entities and governments and agencies and political subdivisions thereof. For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests.

    (b)  "Independent Director" shall mean a natural person named as a Director of the Corporation who is not affiliated, directly or indirectly, with the Manager or its Affiliates, 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 its Affiliates, and is not employed by or an officer of the Corporation.

    (c)  "Initial Public Offering" shall mean the initial public offering of shares of common stock, par value $0.01 per share, of the Corporation.

    (d)  "Manager" shall mean TCW Investment Management Company or such other person that manages the affairs of the Corporation pursuant to a written management agreement.

ARTICLE III
Meetings of Stockholders

Section 1. Place. All meetings of stockholders shall be held at 865 South Figueroa Street, Suite 1800, Los Angeles, California, or at such other place within the United States as shall be stated in the notice of the meeting.

Section 2. Annual Meeting. The President or the Board of Directors may fix the time of the annual meeting of the stockholders for the election of Directors and the transaction of any business as may be properly brought before the meeting, but if no such date and time is fixed by the President or the Board of Directors, the meeting for any calendar year shall be held on the fourth Thursday in May, if that day is not a legal holiday. If that day is a legal holiday, the annual meeting shall be held on the next succeeding business day that is not a legal holiday. Failure to hold an annual meeting does not invalidate the Corporation's existence or affect any otherwise valid corporate acts.

    At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must

be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation that are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 2. The Chairman of the annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 2, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

    Only persons who are nominated in accordance with the procedures set forth in this Section 2 shall be eligible for election as Directors at an annual meeting of stockholders. Nominations of persons for election to the Board of Directors of the Corporation may be made at an annual meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting who complies with the notice provisions set forth in this Section 2. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice of the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitation of proxies for election of Directors, or as otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such persons' written consent to being named in the proxy statement as a nominee or to serving as a Director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation that are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination that pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2. The Chairman of the meeting shall, if the facts warrant, determine and declare to the

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meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

Section 3. Special Meetings. The President, the Chairman of the Board of Directors, a majority of the Directors or a majority of the Independent Directors may call special meetings of the stockholders. Special meetings of stockholders also shall be called by the Secretary upon the written request of the holders of shares entitled to cast not less than fifty percent (50%) of all the votes entitled to be cast at such meeting. Such request shall state the purpose of such meeting and the matters proposed to be acted on at such meeting. The Secretary shall inform such stockholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment to the Corporation of such costs by such stockholders, the Secretary shall give notice to each stockholder entitled to notice of the meeting. Unless requested by stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting, a special meeting need not be called to consider any matter that is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding twelve months.

    At a special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a special meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or (b) otherwise properly brought before the meeting by holders of shares entitled to cast not less than fifty percent (50%) of the votes entitled to be cast at such meeting. For business to be properly brought before a special meeting by such stockholders, such stockholders must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, such stockholders' notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by such stockholders to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the special meeting was mailed or such public disclosure was made. A stockholders' notice to the Secretary shall set forth as to each matter such stockholders propose to bring before the special meeting (a) a brief description of the business desired to be brought before the special meeting and the reasons for conducting such business at the special meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholders proposing such business, (c) the class and number of shares of the Corporation that are beneficially owned by the stockholders, and (d) any material interest of the stockholders in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any special meeting except in accordance with the procedures set forth in this Section 3. The Chairman of the special meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 3, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

    The Board of Directors shall determine whether Directors will be elected at any special meeting of the stockholders. Only persons who are nominated in accordance with the procedures set forth in this Section 3 shall be eligible for election as Directors at a special meeting of stockholders. Nominations of persons for election to the Board of Directors of the Corporation may be made at a special meeting of stockholders by or at the direction of the Board of Directors or by holders of shares entitled to cast not less than fifty percent (50%) of the votes entitled to be cast at such meeting who comply with the notice provisions set forth in this Section 3. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, such stockholders' notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior

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to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by such stockholders to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholders' notice shall set forth (a) as to each person whom the stockholders propose to nominate for election or reelection as a Director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation that are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitation of proxies for election of Directors, or as otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such persons' written consent to being named in the proxy statement as a nominee or to serving as a Director if elected); and (b) as to the stockholders giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholders and (ii) the class and number of shares of the Corporation that are beneficially owned by such stockholders. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholders' notice of nomination that pertains to the nominee. No person shall be eligible for election as a Director of the Corporation at a special meeting of stockholders unless nominated in accordance with the procedures set forth in this Section 3. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

Section 4. Notice. (a) Not less than fifteen (15) nor more than ninety (90) days before each meeting of stockholders, the Secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting, written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by statute, the purpose for which the meeting is called, either by mail or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Corporation, with postage thereon prepaid.

    (b)  If any meeting action is proposed to be taken which, if taken, would entitle stockholders fulfilling the requirements of Section 3-207 et seq. of the Maryland General Corporation Law to an appraisal of the fair value of their shares, the notice of such meeting shall contain a statement of that right and shall be accompanied by a copy of that statutory section.

Section 5. Organization. At every meeting of the stockholders, the Chairman of the Board, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the Chairman of the Board, one of the following officers present shall conduct the meeting in the order stated: the Vice Chairman of the Board, if there be one, the President, the Vice Presidents in their order of rank and seniority, or a Chairman chosen by the stockholders entitled to cast a majority of the votes that all stockholders present in person or by proxy are entitled to cast, shall act as Chairman, and the Secretary, or, in his absence, an assistant secretary, or in the absence of both the Secretary and assistant secretaries, a person appointed by the Chairman, shall act as Secretary.

Section 6. Quorum. At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast fifty percent (50%) of all the votes entitled to be cast at such meeting shall constitute a quorum; but this Section 6 shall not affect any requirement under any statute, the Articles of Incorporation or these Bylaws for the vote necessary for the adoption of any measure. If such quorum shall not be present at any meeting of the stockholders, no business may be transacted, except

4

that the stockholders representing a majority of the shares entitled to vote at such meeting, present in person or by proxy, may vote to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting until such quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted that might have been transacted at the meeting as originally notified.

Section 7. Voting. A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a Director. There shall be no cumulative voting. Each common share may be voted for as many individuals as there are Directors to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter that may properly come before the meeting, unless more than a majority of the votes cast is required by statute, by the Articles of Incorporation or by these Bylaws. Each stockholder of record shall have the right, at every meeting of stockholders, to one vote for each share held, except shares that are the subject of a redemption notice as provided in the Articles of Incorporation.

Section 8. Proxies. A stockholder may vote the common shares owned of record by him, either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it or of his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given.

Section 9. Voting of Shares by Certain Holders. Shares registered in the name of a trust or another corporation, if entitled to be voted, may be voted by the president, a vice president or a proxy appointed by the president or a vice president of such trust or other corporation, unless some other person who has been appointed to vote such shares pursuant to a bylaw or a resolution of the board of such trust or other corporation presents a certified copy of such bylaw or resolution, in which case such person may vote such shares. Any fiduciary may vote shares registered in his name as such fiduciary, either in person or by proxy.

    Shares indirectly owned by the Corporation shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall all be counted in determining the total number of outstanding shares at any given time.

    The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the share transfer books, the time after the record date or closing of the share transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified shares in place of the stockholder who makes the certification.

Section 10. Inspectors. At any meeting of stockholders, the Chairman of the meeting may, or upon the request of any stockholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such

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other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders.

    Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof.

Section 11. Determination of Stockholders of Record. The Board of Directors shall fix a date, not more than ninety (90) nor less than fifteen (15) days preceding the date of any meeting of stockholders, and not more than ninety (90) days preceding the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the stockholders entitled to notice of, or to vote at, any such meeting, or entitled to receive any such dividend or distribution or allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares.

    When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this Section 11, such determination shall apply to any adjournment thereof unless the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting, in which case the Board of Directors shall fix a new record date.

Section 12. Action Without a Meeting. Any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if a consent in writing, setting forth such action, is signed by each stockholder entitled to vote on the matter and any other stockholder entitled to notice of a meeting of stockholders (but not to vote thereat) has waived in writing any right to dissent from such action, and such consent and waiver are filed with the minutes of proceedings of the stockholders.

Section 13. Voting by Ballot. Voting on any question or in any election may be viva voce unless the presiding officer shall order or any stockholder shall demand that voting be by ballot.

Section 14. Control Share Acquisition Statute. Subtitle 7 of Title 3 of the Maryland General Corporation Law shall not apply to any acquisition of shares of capital stock of the Corporation.

ARTICLE IV
Directors

Section 1. General Powers. The Board of Directors shall have full power to conduct, manage and direct the business and affairs of the Corporation, and all powers of the Corporation, except those specifically reserved or granted to the stockholders by statute or by the Articles of Incorporation or these Bylaws, shall be exercised by, or under the authority of, the Board of Directors. Except as otherwise agreed between the Corporation and the Director, each individual Director, including each Independent Director, may engage in other business activities of the type conducted by the Corporation and is not required to present to the Corporation any investment opportunities presented to them even though the investment opportunities may be within the scope of the Corporation's investment policies.

Section 2. Number, Tenure and Qualifications. At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of Directors, provided that the number thereof shall not be less than three (3) (or, if greater, the minimum number required by the General Laws of the State of Maryland now or hereafter in force and provided that if there is only one (1) stockholder of the Corporation, there may be one (1) Director), nor more than nine (9), and further provided that the tenure of office of a Director shall not be affected by any decrease in the number of Directors. Pursuant to the Articles of Incorporation of the Corporation, at all times subsequent to the closing of the Initial Public Offering when there shall be at least seven (7) Directors, the Directors shall be divided into three (3) classes with terms of office

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of three years each, as nearly equal in numbers as the then total number of Directors constituting the entire Board permits, with the term of office of one class expiring at the annual meeting of stockholders in each year. Each class of Directors shall contain at least one Independent Director and at least one Director who is not an Independent Director.

    At the initial annual meeting of stockholders, Directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, Directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and Directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies in the Board of Directors for any reason, and any directorships resulting from any increase in the number of Directors, may be filled as set forth in Section 3 of this Article, and any Directors so chosen shall hold office until the next election of the class for which such Directors shall have been chosen and until their successors shall be elected and qualified, or until his or her resignation, removal (in accordance with the Articles of Incorporation and these Bylaws) or death.

    At all times (except (i) during a period not to exceed sixty (60) days following the death, resignation, incapacity or removal from office of a Director prior to the expiration of the Director's term of office or (ii) prior to the closing date of the Initial Public Offering), a majority of the Directors shall be Independent Directors.

    Notwithstanding the foregoing requirement that a majority of the Directors be Independent Directors, no action otherwise validly taken by the Board of Directors during a period in which it is permitted in accordance with the preceding paragraph that a majority of its members are not Independent Directors shall be invalidated or otherwise affected by such circumstance, nor shall such circumstance subject the Directors taking any such action to a higher standard of care or to liability other than that which would have applied to such action had a majority of the members of the Board of Directors been Independent Directors at the time such action was taken.

Section 3. Changes in Number; Vacancies. Except in the case of a vacancy on the Board of Directors among the Directors elected by a class of equity shares other than common shares or as provided in Section 5 of this Article, any vacancy on the Board of Directors (including a vacancy resulting from an increase in the number of Directors) shall be filled by the affirmative vote of a majority of the remaining Directors. Any vacancy on the Board of Directors among the Directors elected by a class of equity shares (other than common shares) may be filled by a majority of the remaining Directors elected by that class or the sole remaining Director elected by that class, or by the stockholders by a majority of the votes of that class. If the stockholders of any class or series are entitled separately to elect one or more Directors, a majority of the remaining Directors elected by that class or series or the sole remaining Director elected by that class or series may fill any vacancy among the number of Directors elected by that class or series. Notwithstanding anything herein to the contrary, the vacancy for any reason of any Independent Director shall be filled by a majority vote of the remaining members of the Board of Directors, including a majority vote of the remaining Independent Directors. A Director elected by the Board of Directors to fill a vacancy shall be elected to hold office until the next annual meeting of stockholders or until his successor is elected and qualified. The Board of Directors may declare unqualified a Director who has been declared of unsound mind by an order of court who has pled guilty or nolo contendere to, or been convicted of, a felony involving moral turpitude, or who has wilfully violated the Corporation's Articles of Incorporation or these Bylaws. The office of a Director declared unqualified shall be considered vacant until filled as herein provided.

Section 4. Resignations. Any Director or member of a committee may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of the receipt by the Chairman of the Board, the President or the Secretary.

Section 5. Removal of Directors. Any Director may be removed, with or without cause, by the affirmative vote of the stockholders holding not less than two-thirds (66²/3%) of all the votes entitled to

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be cast for the election of Directors; provided, however, that in the case of any Director elected by holders of a class of equity shares, other than common shares, such Directors may be removed, with or without cause, by the affirmative vote of not less than two-thirds (66²/3%) of all the votes entitled to be cast by that class of equity shares. In the case of a vacancy resulting from the removal of a Director, such vacancy may be filled by the stockholders by the vote of a majority of the votes entitled to be cast in the election of Directors, provided that a vacancy resulting from the removal of a Director elected by a class of equity shares, other than common shares, may be filled by the vote of a majority of the votes of such class entitled to be cast in the election of Directors.

Section 6. Annual and Regular Meetings. An annual meeting of the Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this bylaw being necessary. The Board of Directors may provide, by resolution, the time and place, either within or without the State of California, for the holding of regular meeting of the Board of Directors without other notice than such resolution.

Section 7. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the President, a majority of the Board of Directors or a majority of the Independent Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of California, as the place for holding any special meeting of the Board of Directors called by them.

Section 8. Notice. Notice of any special meeting of the Board of Directors shall be given by written notice delivered personally, telegraphed or mailed to each Director at his business or resident address. Personally delivered or telegraphed notices shall be given at least two days prior to the meeting. Notice by mail shall be given at least five days prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be given when the telegram is delivered to the telegraph company. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless required by statute or these Bylaws.

Section 9. Quorum. A majority of the entire Board of Directors shall constitute a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a quorum is present at said meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice.

    The Directors present at a meeting that has been duly called and convened may continue to transact business until adjournment notwithstanding the withdrawal of enough Directors to leave less than a majority of the entire Board, provided that at least one-third of the entire Board of Directors remains present at that meeting, in which case a quorum will still be deemed present.

Section 10. Voting. (a) Except as provided in subsection (b) of this Section 10, the action of the majority of the Directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by the Articles of Incorporation, these Bylaws, or applicable statute.

    (b)  Notwithstanding anything in these Bylaws to the contrary, any action pertaining to a transaction involving the Corporation in which the Manager, any Director or officer of the Corporation or any Affiliate of any of the foregoing persons has any direct or indirect interest other than solely as a result of such person's status as Manager, Director or officer of the Corporation, shall be approved by a majority of the Directors and a majority of the disinterested Independent Directors, even if the disinterested Independent Directors constitutes less than a quorum. In approving any such transaction

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or series of transactions, the Directors and the disinterested Independent Directors must determine that:

(i)

the transaction as contemplated is fair as to the Corporation and its stockholders at the time it is authorized, approved and ratified;



(ii)

if an acquisition of property other than mortgage securities or mortgage loans is involved, the total consideration is not in excess of the appraised value of such property being acquired; and



(iii)

if the transaction involves compensation to the Manager or its Affiliates for services rendered in a capacity other than that contemplated by the management arrangements, to the knowledge of the Directors such compensation is not greater than the customary charges for comparable services generally available from other competent unaffiliated persons.

Section 11. Telephone Meetings. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.

Section 12. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each Director and such written consent is filed with the minutes of proceedings of the Board of Directors.

Section 13. Compensation. Independent Directors shall receive such reasonable compensation for their services as Directors as the Board of Directors may fix or determine from time to time; such compensation may include a fixed sum, capital stock of the Corporation or options to purchase capital stock of the Corporation and Directors shall receive reimbursement of reasonable expenses incurred in traveling to and from or attending regular or special meetings of the Board of Directors or of any committee thereof.

Section 14. Policies and Resolutions. The investment policies of the Corporation and the restrictions thereon shall be established from time to time by the Board of Directors, including a majority of the Independent Directors. The Independent Directors shall review the investment policies of the Corporation at least annually to determine that the policies then being followed by the Corporation are in the best interests of its stockholders. Each such determination and the basis therefor shall be set forth in the minutes of the Board of Directors. It shall be the duty of the Board of Directors to insure that the purchase, sale, retention and disposal of the Corporation's assets, the investment policies, operating policies and the borrowing policies of the Corporation and the limitations thereon or amendment thereof are at all times:

    (a)  consistent with such policies, limitations and restrictions as are contained in these Bylaws, or in the Corporation's Articles of Incorporation, subject to revision from time to time at the discretion of the Board of Directors (including approval by a majority of the Independent Directors) without stockholder approval unless otherwise required by law; and

    (b)  in compliance with the restrictions applicable to real estate investment trusts pursuant to the Internal Revenue Code of 1986, as amended.

Section 15. External Management.

    (a)  Authorization. The Board of Directors may authorize, subject to such conditions, if any, as may be required by an applicable statute, rule, regulation or another by-law of the Corporation, the execution and performance by the Corporation of one or more agreements with a Manager whereby, subject to the supervision and control of the Board of Directors, the Manager shall render or make available to the Corporation managerial, investment, advisory and/or related services, office space and

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other services and facilities (including the management or supervision of the investments of the Corporation) upon such terms and conditions as may be provided in such agreement or agreements (including the compensation payable thereunder by the Corporation).

    (b)  Term of Management Agreement; Compensation Review. Upon completion of any initial term, each contract for the services of a Manager entered into by the Board of Directors shall be terminable by a majority of the Directors upon sixty (60) days' written notice without cause. Such termination right may, at the discretion of the Independent Directors, include a termination fee. During the term of any Management Agreement, the Board of Directors shall review and approve the mathematical calculation of any base and incentive compensation paid to any Manager on a quarterly basis, one quarter in arrears, during each scheduled quarterly Board of Directors meeting, as well as any annual reconciliation thereof.

    (c)  Review of Management Arrangements. The Board of Directors (including a majority of the Independent Directors) shall evaluate the performance of the Manager at least annually and prior to any entry into or renewal of any management agreement, provided that no such evaluation shall be necessary prior to the Corporation's entry into its initial management agreement with its initial Manager. The Board of Directors (including a majority of the Independent Directors) shall further determine whether the compensation of the Manager is reasonable in relation to the nature and quality of services performed.  The evaluation of the Board of Directors shall be based on such factors as the Directors may deem relevant, which may include the following (it being understood that the Independent Directors shall have no obligation to use the following factors in developing their findings):

    (i)  The size of the management fee in relation to the size, compensation and profitability of the investment portfolio of the Corporation;

    (ii) The success of the Manager in generating opportunities that meet the investment objectives of the Corporation;

    (iii) The rates charged to other corporations similar to the Corporation and to other investors by advisers performing similar services; and

    (iv) The quality and extent of service and advice furnished to the Corporation.

    (d)  Qualifications of Successor Manager. Upon any termination of the initial management arrangements with the initial Manager, the Board of Directors (including a majority of the Independent Directors) shall determine that any successor Manager possesses sufficient qualifications (a) to perform the management function for the Corporation and (b) to justify the compensation provided for in its contract with the Corporation.

Section 16. Limitation on Unsecured Debt. The amount of the Corporation's unsecured debt (excluding collateralized borrowings such as reverse repurchase agreements, dollar-roll agreements, warehouse lines of credit and collateralized mortgage obligations) shall be limited to three hundred percent (300%) of the aggregate amount of the Corporation's equity on a consolidated basis, unless a greater percentage or amount is specifically approved by a majority of the Independent Directors.

ARTICLE V
Committees

Section 1. Committees of the Board. The Board of Directors may appoint from among its members an executive committee and other committees comprised of one or more Directors. The Board of Directors shall appoint an audit committee comprised of not less than two members, a majority of whom are Independent Directors. The Board of Directors shall appoint a compensation committee comprised of not less than three Independent Directors. The Board of Directors may delegate to any

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committee any of the powers of the Board of Directors except the power to elect Directors, declare dividends or distributions on shares, recommend to the stockholders any action that requires stockholder approval, amend or repeal these Bylaws, approve any merger or share exchange which does not require stockholder approval or issue shares. However, if the Board of Directors has given general authorization for the issuance of shares, a committee of the Board of Directors, in accordance with a general formula or method specified by the Board of Directors by resolution or by adoption of a share option plan, may fix the terms of shares, subject to classification or reclassification, and the terms on which any shares may be issued.

    Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors.

    One-third, but not less than two (unless the committee has less than two members), of the members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or any two members of any committee (unless the committee has less than two members, in which case one member of such committee) may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any member of any such committee, the members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of such absent or disqualified members; provided, however, that in the event of the absence or disqualification of an Independent Director, such appointee shall be an Independent Director.

    Each committee shall keep minutes of its proceedings and shall report the same to the Board of Directors at the meeting next succeeding, and any action by the committees shall be subject to revision and alteration by the Board of Directors, provided that no rights of third persons shall be affected by any such revision or altercation.

    Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternative members to replace any absent or disqualified members or to dissolve any such committee.

Section 2. Telephone Meetings. Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in a person at the meeting.

Section 3. Action By Committees Without a Meeting. Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee.

ARTICLE VI
Officers

Section 1. General Provisions. The officers of the Corporation may consist of a Chairman of the Board, a Vice Chairman of the Board, a President, a Chief Executive Officer, a Chief Operating Officer, one or more Vice Presidents, a Chief Financial Officer or Treasurer, one or more assistant treasurers, a Secretary, and one or more assistant secretaries and such other officers as may be elected in accordance with the provisions of Section 2 of this Article VI. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. If the election of officers shall not be held at such meeting, such

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election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices may be held by the same person. In its discretion, the Board of Directors may leave unfilled any office except that of President and Secretary. Election or appointment of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent.

Section 2. Subordinate Officers, Committees and Agents. The Board of Directors may from time to time elect such other officers and appoint such committees, employees, and other agents as the business of the Corporation may require, including one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws, or as the Board of Directors may from time to time determine. The Directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents.

Section 3. Removal and Resignation. Any officer or agent of the Corporation may be removed by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors, the Chairman of the Board, the President or the Secretary. Any resignation shall take effect at the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation.

Section 4. Vacancies. A vacancy in any office may be filled by the Board of Directors for the balance of the term.

Section 5. General Powers. All officers of the Corporation as between themselves and the Corporation shall, respectively, have such authority and perform such duties in the management of the property and affairs of the Corporation as may be determined by resolution of the Board of Directors, or in the absence of controlling provisions in a resolution of the Board of Directors, as may be provided in these Bylaws.

Section 6. Chief Executive Officer. The Board of Directors may designate a Chief Executive Officer from among the elected officers. The Chief Executive Officer shall have responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the administration of the business affairs of the Corporation.

Section 7. Chief Operating Officer. The Board of Directors may designate a Chief Operating Officer from among the elected officers. Said officer will have the responsibility and duties as set forth by the Board of Directors or the Chief Executive Officer.

Section 8. Chairman and Vice Chairman of the Board. The Chairman of the Board, if there be one, shall preside over the meetings of the Board of Directors and of the stockholders at which he shall be present. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if there be one, shall preside at such meetings at which he shall be present. The Chairman of the Board and the Vice Chairman of the Board shall, respectively, perform such other duties as may be assigned to him or them by the Board of Directors.

Section 9. President. The President shall in general supervise and control all of the business and affairs of the Corporation. Unless the President is not a member of the Board of Directors, in the absence of both the Chairman and Vice Chairman of the Board, he shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. In the absence of a designation of a Chief Executive Officer by the Board of Directors, the President shall be the Chief Executive Officer and shall be ex officio a member of all committees that may, from time to time, be

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constituted by the Board of Directors. He may execute any deed, mortgage, bond, contract or other instrument to which the Corporation is a party, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time.

Section 10. Vice Presidents. In the absence of the President or in the event of a vacancy in such office, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of the election) shall perform the duties of the President and when so acting shall have all the powers of and be subject to all the restrictions upon the President, and shall perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors. The Board of Directors may designate one or more Vice Presidents as executive or senior Vice President or as Vice President for particular areas of responsibility.

Section 11. Secretary. The Secretary shall (a) keep the minutes of the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder; (e) have general charge of the share transfer books of the Corporation; and (f) in general perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

Section 12. Chief Financial Officer or Treasurer. The Chief Financial Officer or Treasurer shall have the custody of the corporate funds and securities and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors.

    He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and Board of Directors, at the regular meetings of the Board of Directors or whenever they may require it, an account of all his transactions as Chief Financial Officer or Treasurer and of the financial condition of the Corporation.

    If required by the Board of Directors, he shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, all books, papers, vouchers, moneys and other property of whatever kind in his possession or under his control belonging to the Corporation.

Section 13. Assistant Secretaries and Assistant Treasurers. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or the Chief Financial Officer Treasurer, respectively, or by the President or the Board of Directors. The assistant treasurers shall, if required by the Board of Directors, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Board of Directors.

Section 14. Salaries. The salaries of the officers, if any, shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a Director of the Corporation.

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ARTICLE VII
Execution of Corporate Instruments and Voting Securities

Section 1. Contracts. The Board of Directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances.

Section 2. Checks and Drafts. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agents or agents of the Corporation and in such manner as shall from time to time be determined by the Board of Directors.

Section 3. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may designate.

Section 4. Voting Securities Owned by the Corporation. All stock and other securities of other corporations owned or held by the Corporation for itself or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized to do so by resolution of the Board of Directors or, in the absence of such authorization, by the Chairman of the Board or by the Chief Executive Officer.

ARTICLE VIII
Capital Stock

Section 1. Certificates of Shares. Each stockholder shall be entitled to a certificate or certificates which shall represent and certify the number of shares of each kind and class of shares held by him in the Corporation. Each certificate shall be signed by the Chairman of the Board or the President or a Vice President and countersigned by the Secretary or an assistant secretary or the Treasurer or an assistant treasurer and may be sealed with the corporate seal.

    The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Corporation shall, from time to time, issue several classes of shares, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing shares which is restricted as to its transferability or voting powers, which is preferred or limited as to its dividends or as to its share of the assets upon liquidation or which is redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. In lieu of such statement or summary, the Corporation may set forth upon the face or back of the certificate a statement that the Corporation will furnish to any stockholder, upon request and without charge, a full statement of such information.

Section 2. Lost Certificate. The Board of Directors may direct a new certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the shares certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or his legal representative to advertise the same in such manner as it shall require and/or to give bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate.

Section 3. Transfer Agents and Registrars. At such time as the Corporation lists its securities on a national securities exchange or qualifies for trading in the over the counter market, the Board of Directors shall appoint one or more banks or trust companies in such city or cities as the Board of

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Directors may deem advisable, from time to time, to act as transfer agents and/or registrars of the shares of the Corporation; and, upon such appointments being made, no certificate representing shares shall be valid until countersigned by one of such transfer agents and registered by one of such registrars.

Section 4. Transfer of Shares. No transfers of shares of the Corporation shall be made if (i) void ab initio pursuant to any provision of the Corporation's Articles of Incorporation or (ii) the Board of Directors, pursuant to any provision of the Corporation's Articles of Incorporation, shall have refused to permit the transfer of such shares. Permitted transfers of shares of the Corporation shall be made on the share records of the Corporation only upon the instruction of the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and upon surrender of the certificate or certificates, if issued, for such shares properly endorsed or accompanied by a duly executed share transfer power and the payment of all taxes thereon. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, as to any transfers not prohibited by any provision of the Corporation's Articles of Incorporation by action of the Board of Directors thereunder, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

Section 5. Share Ledger. The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agents an original or duplicate share ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder.

ARTICLE IX
Dividends

Section 1. Declaration. Dividends upon the shares of the Corporation may be declared by the Board of Directors, subject to applicable provisions of law and the Articles of Incorporation. Dividends may be paid in cash, property or shares of the Corporation, subject to applicable provisions of law and the Articles of Incorporation.

Section 2. Contingencies. Before payment of any dividends, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends, for repairing or maintaining the property of the Corporation, its subsidiaries or any partnership for which it serves as general partner, or for such other purpose as the Board of Directors shall determine to be in the best interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created.

ARTICLE X
Indemnification and Limitation of Liability

Section 1. Indemnification of Agents. The Corporation shall indemnify, in the manner and to the fullest extent permitted by law, any person (or the estate of any person) who is or was a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a Director or officer of the Corporation, or such Director or officer is or was serving at the request of the Corporation as a Director, officer, agent or employee of another corporation, partnership, joint venture, trust or other enterprise. To the fullest extent permitted by law, but subject to the provisions of this Article, the indemnification provided herein shall include expenses (including attorneys' fees), judgments, fines and

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amounts paid in settlement. The Corporation shall indemnify other employees and agents to such extent as shall be authorized by the Board of Directors or these Bylaws and be permitted by law. Any repeal or modification of this Article X by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any right to indemnification or advancement of expenses hereunder existing at the time of such repeal or modification. The right to indemnification conferred in this Article shall be a contract right.

Section 2. Authority to Advance Expenses. Expenses incurred by an officer or Director (acting in his or her capacity as such) in defending an action, suit or proceeding shall be paid by the Corporation in advance of the final disposition thereof; provided, however, that such expenses shall be advanced only upon delivery to the Corporation of an undertaking by or on behalf of such Director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to indemnification by the Corporation as authorized in this Article or otherwise. Expenses incurred by other agents of the Corporation (or by the Directors or officers not acting in their capacity as such, including service with respect to employee benefit plans) may be advanced upon such terms and conditions as the Board of Directors, including a majority of the Independent Directors, deems appropriate. Any obligation to reimburse the Corporation for expense advances shall be unsecured and no interest shall be charged thereon.

Section 3. Right of Claimant to Bring Suit. If a claim under Section 1 or 2 of this Article is not paid in full by the Corporation within 90 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expenses (including attorneys' fees) of prosecuting such claims.

Section 4. Insurance. The Corporation may to the fullest extent permitted by law, purchase and maintain insurance on behalf of any such person against any liability which may be asserted against such person.

Section 5. Indemnification Non-Exclusive. The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expenses to the fullest extent permitted by law, nor shall it be deemed exclusive of any other rights to which any person seeking indemnification from the Corporation may be entitled under any agreement, vote of stockholders or disinterested Directors, or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office.

Section 6. Subrogation. In the event of payment under this Article, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnified person, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Corporation to effectively bring suit to enforce such rights.

Section 7. No Duplication of Payments. The Corporation shall not be liable under this Article to make any payment in connection with any claim against the indemnified person to the extent such person has actually received payment (under any insurance policy, agreement, vote or otherwise) of the amounts otherwise indemnifiable hereunder.

Section 8. Limitation of Liability. To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted from time to time, no Director or officer of the Corporation shall be personally liable to the Corporation or its stockholders, or any of them, for money damages. No amendment of these Bylaws or repeal of any of its provisions shall limit or eliminate the benefits provided to Directors and officers under this provision with respect to any act or omission which occurred prior to such amendment or repeal.

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ARTICLE XI
Seal

Section 1. Seal. The Corporation may have a corporate seal, which may be altered at will by the Board of Directors. The Board of Directors may authorize one or more duplicate or facsimile seals and provide for the custody thereof. Unless specifically required by law, a corporate seal is not required for the due execution of any document.

Section 2. Affixing Seal. Whenever the Corporation is required to place its corporate seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a corporate seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation.

ARTICLE XII
Waiver of Notice

    Whenever any notice is required to be given pursuant to the Articles of Incorporation or these Bylaws of the Corporation or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute.

ARTICLE XIII
Amendment of Bylaws

    The Board of Directors shall have the exclusive power to alter, modify or repeal any Bylaws of the Corporation and to make new Bylaws not inconsistent with the Articles of Incorporation of the Corporation and applicable law, except that the Board of Directors shall not alter, modify or repeal any of the following provisions of the Bylaws without the approval of a majority of the stockholders:

    (a)  Article II, subsection (b);

    (b)  The third sentence of Article IV, Section 2;

    (c)  The third paragraph of Article IV, Section 2;

    (d)  The fourth sentence of Article IV, Section 3;

    (e)  Article IV, Section 10(b);

    (f)  The first paragraph of Article IV, Section 14;

    (g)  Article IV, Section 15; and

    (h)  This Article XIII.

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Amended and Restated Bylaws of APEX MORTGAGE CAPITAL, INC.
TABLE OF CONTENTS
ARTICLE I Offices
ARTICLE II Definitions
ARTICLE III Meetings of Stockholders
ARTICLE IV Directors
ARTICLE V Committees
ARTICLE VI Officers
ARTICLE VII Execution of Corporate Instruments and Voting Securities
ARTICLE VIII Capital Stock
ARTICLE IX Dividends
ARTICLE X Indemnification and Limitation of Liability
ARTICLE XI Seal
ARTICLE XII Waiver of Notice
ARTICLE XIII Amendment of Bylaws

EX-5.1

Exhibit 5.1

[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP]

November 27, 2001

Apex Mortgage Capital, Inc.
865 South Figueroa Street
Suite 1800
Los Angeles, California 90017

Re:

Apex Mortgage Capital, Inc., a Maryland corporation (the "Company")—a Registration Statement on Form S-2 pertaining to Three Million One Hundred Five Thousand (3,105,000) shares (the "Shares") of common stock, par value one cent ($.01) per share (the "Common Stock") of the Company

Ladies and Gentlemen:

    We have acted as special Maryland corporate counsel to the Company in connection with the registration of the Shares under the Securities Act of 1933, as amended (the "Act"), on Form S-2, filed or to be filed with the Securities and Exchange Commission (the "Commission") on or about November 15, 2001, and any amendments thereto, if any are to be filed with the Commission subsequent to the date hereof. You have requested our opinion with respect to the matters set forth below.

    In our capacity as special Maryland corporate counsel to the Company and for the purposes of this opinion, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (collectively, the "Documents"):

(i)	the corporate charter of the Company (the "Charter"), represented by Articles of Incorporation filed with the State Department of Assessments and Taxation of Maryland (the "Department") on September 15, 1997, Articles of Amendment and Restatement filed with the Department on November 25, 1997, Articles Supplementary filed with the Department on July 23, 1999 and Articles of Revival filed with the Department on March 22, 2000;
(ii)	the Bylaws of the Company, as adopted on September 15, 1997, and as amended and restated pursuant to the Amended and Restated Bylaws of the Company on or as of November 15, 2001 (the "Bylaws");
(iii)	the Written Organizational Action of the Board of Directors of the Company, dated as of September 15, 1997 (the "Organizational Minutes");
(iv)	resolutions adopted by the Board of Directors of the Company on November 15, 2001, which, among other things, authorized the issuance of the Shares (the "Directors' Resolutions");
(v)	a certificate of Philip A. Barach, the President and Chief Executive Officer of the Company and Philip K. Holl, the Assistant Secretary of the Company, of even date herewith (the "Officers' Certificate"), to the effect that, among other things, the Charter, the Bylaws, the Organizational Minutes and the Directors' Resolutions are true, correct and complete, have not been rescinded or modified and are in full force and effect on the date of the Officers' Certificate;
(vi)	the Registration Statement on Form S-2 and the related form of prospectus included therein, in substantially the form filed or to be filed with the Commission pursuant to the Act (the "Registration Statement");
(vii)	a status certificate of the Department, dated November 27, 2001, to the effect that the Company is duly incorporated and existing under the laws of the State of Maryland; and

(viii)
such other laws, records, documents, certificates, opinions and instruments as we have deemed necessary to render this opinion, subject to the limitations, assumptions and qualifications noted below.

    In reaching the opinion set forth below, we have assumed the following:

(a)

each person executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so;



(b)

each natural person executing any of the Documents is legally competent to do so;



(c)

any of the Documents submitted to us as originals are authentic; the form and content of any Documents submitted to us as unexecuted drafts do not differ in any respect relevant to this opinion from the form and content of such documents as executed and delivered; any of the Documents submitted to us as certified or photostatic copies conform to the original documents; all signatures on all of the Documents are genuine; all public records reviewed or relied upon by us or on our behalf are true and complete; all statements and information contained in the Documents are true and complete; there has been no modification of, or amendment to, any of the Documents, and there has been no waiver of any provision of any of the Documents by action or omission of the parties or otherwise;



(d)

the final number of Shares to be offered and sold by the Company pursuant to the Registration Statement and the final price to be received by the Company for the Shares will have been determined by the Pricing Committee (as defined in the Directors' Resolutions) in accordance with the Directors' Resolutions prior to the issuance of the Shares;



(e)

none of the Shares will be issued or transferred in violation of the provisions of Article V, Section 2 of the Charter relating to restrictions on ownership and transfer of stock; and



(f)

none of the Shares will be issued and sold to an Interested Stockholder of the Company or an Affiliate thereof, all as defined in Subtitle 6 of Title 3 of the Maryland General Corporation Law (the "MGCL"), in violation of Section 3-602 of the MGCL.

    Based on the foregoing, and subject to the assumptions and qualifications set forth herein, it is our opinion that, as of the date of this letter:

1)

The Company is a corporation duly incorporated and validly existing as a corporation in good standing under the laws of the State of Maryland.



2)

The Shares have been duly authorized for issuance by the Company, and the Shares, when issued and delivered in exchange for payment of the consideration therefor, will be validly issued, fully paid and non-assessable.

    The foregoing opinion is limited to the substantive laws of the State of Maryland, and we do not express any opinion herein concerning any other law. We express no opinion as to the applicability or effect of any federal or state securities laws, including the securities laws of the State of Maryland, or as to federal or state laws regarding fraudulent transfers. To the extent that any matter as to which our opinion is expressed herein would be governed by any jurisdiction other than the State of Maryland, we do not express any opinion on such matter.

    This opinion letter is issued as of the date hereof and is necessarily limited to laws now in effect and facts and circumstances presently existing and brought to our attention. We assume no obligation to supplement this opinion letter if any applicable laws change after the date hereof, or if we become aware of any facts or circumstances that now exist or that occur or arise in the future and may change the opinions expressed herein after the date hereof.

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    This opinion is being furnished to you solely for submission to the Commission as an exhibit to the Registration Statement and, accordingly, may not be relied upon by, quoted in any manner to, or delivered to any other person or entity (other than O'Melveny & Myers LLP, counsel to the Company, which may rely on this opinion in connection with its opinion, dated the date hereof, filed as an exhibit to the Registration Statement) without, in each instance, our prior written consent.

    We consent to your filing this opinion as an exhibit to the Registration Statement and further consent to the filing of this opinion as an exhibit to the applications to securities commissioners for the various states of the United States for registration of the Shares. We also consent to the identification of our firm as Maryland counsel to the Company in the section of the Registration Statement entitled "Legal Matters." In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Act.

Very truly yours,

/s/ Ballard Spahr Andrews & Ingersoll, LLP

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EX-8.1

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Exhibit 8.1

[LETTERHEAD OF O'MELVENY & MYERS LLP]

November 27, 2001

Apex Mortgage Capital, Inc.
865 South Figueroa Street
Suite 1800
Los Angeles, California 90017

Re:

Registration Statement on Form S-2

Ladies and Gentlemen:

    We have acted as special tax counsel to Apex Mortgage Capital, Inc., a Maryland Corporation (the "Company"), in connection with the preparation of the Company's Registration Statement on Form S-2, Registration No. 333-73448, filed with the Securities and Exchange Commission under the Securities Act on November 15, 2001 (as amended and together with all exhibits thereto, the "Registration Statement"), relating to the offering and sale (the "Offering") of up to 2,700,000 shares of the Company's Common Stock (exclusive of 405,000 shares that may be sold pursuant to an over- allotment option), par value $.01 per share (the "Common Stock"). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Registration Statement.

    In formulating our opinions herein, we have reviewed the Registration Statement and such certificates, including a certificate signed by the Interim Chief Financial Officer of the Company dated as of November 27, 2001 (the "Officer's Certificate"), and other documents, and statutes, rules, and regulations as we have deemed necessary or appropriate as a basis for the opinions set forth below. In conducting such review for purposes of rendering our opinions, we have not conducted an independent investigation of any of the facts set forth in the Registration Statement, the Officer's Certificate, or any other documents, or certificates, and have relied upon the Company's representations that the information presented in such documents, or certificates or otherwise furnished to us accurately represent and completely describe all material facts relevant to our opinions herein, and upon the authenticity of documents submitted to us as originals or certified copies, the accuracy of copies, the genuineness of all signatures and the legal capacity of all natural persons. No facts have come to our attention, however, that would cause us to question the accuracy and completeness of such facts or documents in a material way. We have also relied upon the opinion of Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland, dated November 27, 2001, with respect to all matters of Maryland law.

Apex Mortgage Capital, Inc.
November 27, 2001
Page 2

    In rendering these opinions we have assumed that (i) the transactions described in or contemplated by any of the aforementioned documents have been or will be consummated in accordance with the operative documents, (ii) the Company has been and will continue to be organized and operated in the manner described in the Officer's Certificate, the Registration Statement, and the other relevant documents referred to above, and (iii) there will be no changes in the applicable laws of the State of Maryland, the Internal Revenue Code of 1986, as amended (the "Code"), the regulations promulgated thereunder by the Treasury Department (the "Treasury Regulations"), and the interpretations of the Code and Treasury Regulations by the courts and the Internal Revenue Service ("IRS"), all as they exist on the date of this letter. Any material change that is made after the date hereof in any of the foregoing bases for our opinions could affect our conclusions.

    Based upon and subject to the foregoing, we are of the opinion that the Company has been organized and operated in conformity with the requirements for qualification as a real estate investment trust ("REIT") under the Code for its taxable years ended December 31, 1997 through December 31, 2000, and the Company's contemplated method of operations, as described in the Registration Statement, will enable it to satisfy the requirements for such qualification for its taxable year ending December 31, 2001, and each taxable year thereafter.

    The Company's qualification as a REIT under the Code will depend upon the Company's ability to meet, through actual operating results, distribution levels, diversity of stock ownership, and the various income and asset qualification tests imposed under the Code. Such operating results may not be reviewed by us and, accordingly, no assurance can be given that the actual results of the Company's operations for any one taxable year will satisfy the requirements for REIT qualification. Moreover, certain aspects of the Company's method of operations have not been considered by the courts or the IRS. There can be no assurance that the courts or the IRS will agree with this opinion.

    We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. We also consent to the references to O'Melveny & Myers LLP under the caption "Federal Income Tax Considerations" in the Registration Statement. In giving this consent, we do not admit that we are in the category of persons whose consent is required by Section 7 of the Securities Act or the rules and regulations promulgated thereunder by the Securities and Exchange Commission.

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

Respectfully submitted,
/s/ O'MELVENY & MYERS LLP

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[LETTERHEAD OF O'MELVENY & MYERS LLP]

EX-23.1

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EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

    We consent to the incorporation by reference in this Amendment No. 1 to the Registration Statement of Apex Mortgage Capital, Inc. on Form S-2 (Registration No. 333-73448) of our report dated February 9, 2001, included and incorporated by reference in the Annual Report on Form 10-K of Apex Mortgage Capital, Inc. for the year ended December 31, 2000, and to the use of our report dated February 9, 2001, appearing in the prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such prospectus.

DELOITTE & TOUCHE LLP

Los Angeles, California
November 27, 2001

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INDEPENDENT AUDITORS' CONSENT