10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]

FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the year ended December 31, 1999 or

Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from to

Commission File Number: 1-13991

AMERICA FIRST MORTGAGE INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)

Maryland 13-3974868
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)


399 Park Avenue, 36th Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)


(212) 935-8760
(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class Name of Exchange on which Registered
---------------------------- ------------------------------------
Common Stock, $.01 par value New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

None


































Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of the chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the common stock held by non-affiliates of the
Registrant on March 10, 2000, based on the final sales price per share as
reported in The Wall Street Journal on March 13, 2000, was $42,576,956.

The number of shares of the Registrant's common stock outstanding on
March 10, 2000, was 8,917,842.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive proxy statement relating to the Company's 2000 Annual Meeting of
Stockholders to be filed hereafter (incorporated into Part III hereof).





















































TABLE OF CONTENTS

Page


PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 10

PART II

Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. . . . . 17
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 20
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 38

PART III

Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 38
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 38
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 38
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 38

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 38

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40








































PART I

Item 1. Business.

THE COMPANY

America First Mortgage Investments, Inc. (the "Company") is primarily engaged
in the business of investing in mortgage-backed securities and mortgages. Its
principal business objective is to generate net income for distribution to its
stockholders resulting from the spread between the interest income it earns on
its investments and the costs of capital to finance its investments. The
Company's business and investment strategy is discussed in more detail below.

The Company has elected to be taxed as a real estate investment trust (a
"REIT"). One of the requirements of maintaining its status as a REIT is that
the Company distribute at least 95% of its annual taxable net income to its
stockholders, subject to certain adjustments. For additional information, one
should refer to the information under "Certain Federal Income Tax
Considerations," below.

The Company was incorporated in Maryland on July 24, 1997, and began business
operations on April 10, 1998, when the Company consummated a merger
transaction (the "Merger") with America First Participating/Preferred Equity
Mortgage Fund Limited Partnership ("PREP Fund 1" or the "Predecessor"),
America First PREP Fund 2 Limited Partnership ("PREP Fund 2") and America
First PREP Fund 2 Pension Series Limited Partnership ("Pension Fund")
(collectively referred to as the "PREP Funds"). As a result of the Merger,
PREP Fund 1 and PREP Fund 2 were merged into the Company and Pension Fund
became a partnership subsidiary of the Company. Pension Fund was liquidated
and dissolved in December, 1999, and, as a result, the Company acquired
approximately 99% of the assets of Pension Fund. The remaining assets,
consisting solely of cash, were distributed to the remaining holders of
Pension Fund BUCs. The Company issued a total of 9,035,084 shares of its
common stock to former partners of PREP Fund 1, PREP Fund 2 and Pension Fund.
Upon completion of the Merger, the Company began implementing the investment
strategy described below. The Company's investment strategy differs from that
of the PREP Funds.

The Company is an externally managed REIT. As such it has no employees of its
own. The Company has entered into an Advisory Agreement with America First
Mortgage Advisory Corporation (the "Advisor"), which is a subsidiary of
America First Companies L.L.C. ("America First"). Under the Advisory
Agreement, the Advisor provides day-to-day management of the Company's
operations. The executive officers of the Company are employees of America
First and are officers of the Advisor. More information relating to the
Company's management is discussed under "Executive Officers of the Company" in
Item 4 below and in the Company's Proxy Statement relating to its 2000 Annual
Meeting of Stockholders.

BUSINESS AND INVESTMENT STRATEGY

The Company is engaged in the business of investing in mortgages and
mortgage-backed securities acquired in the secondary market from investment
banks, savings and loans, banks and other mortgage banking institutions. The
Company is not in the business of originating mortgage loans or providing
other types of financing to the owners of real estate. While the Company has
the authority to hold other types of investments, including those it inherited
from the PREP Funds, its principal investment strategy is to acquire mortgages
and mortgage-backed securities financed through the use of leverage. See
"Financing Strategy," below. During the period from the consummation of the
Merger through December 31, 1999, the Company purchased mortgage securities
with a face value at the time of purchase of approximately $571.2 million
(mortgage securities with a face value of approximately $338.7 million were
purchased during the twelve months ended December 31, 1999).

The Company's investment policy requires that at least 70% of its investment
portfolio consist of mortgage securities or mortgage loans that are either (i)
insured or guaranteed as to principal and interest by an agency of the U.S.
government, such as the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), (ii) rated in one of the two highest rating
categories by either Standard & Poor's or Moody's, or (iii) considered to be
of equivalent credit quality as determined by the Advisor and approved by the
Company's investment committee. The remainder of the Company's assets may be
either: (i) mortgage assets rated at least investment grade or considered to

be of equivalent credit quality by the Advisor with approval from the
Company's investment committee; (ii) direct investment (mezzanine or equity)
in multifamily apartment properties; (iii) investments in limited
partnerships, equities, real estate investment trusts or closed-end funds
owning a portfolio of mortgage and/or real estate assets; or (iv) other
corporate debt or equity securities or government fixed-income instruments
that provide increased call protection relative to the Company's mortgage
securities.

At December 31, 1999, approximately 79% of the Company's assets consisted of
mortgage-backed securities insured or guaranteed by GNMA, FNMA or FHLMC
("Agency Certificates") backed by single-family mortgage loans. Remaining
assets at that date consisted of equity interests in limited partnerships
owning apartment properties, non-voting preferred stock in a corporation
owning an interest in a retirement living facility and certain corporate debt
and equity securities. The corporation which owns a retirement living
facility is in the process of divesting itself of such facility and plans to
structure a like-kind-exchange transaction in order to defer recognition of a
gain on the sale. In addition, the Company is considering divesting itself of
certain of these other assets and will use net proceeds from the sale of these
assets to acquire additional assets which are consistent with its investment
strategy.

The Company intends that at least 66% of its mortgage assets be
adjustable-rate mortgages or mortgage-backed securities ("ARMs"). At December
31, 1999, approximately 93% of the Company's mortgage assets were ARMs.
Included within the Company's ARMs portfolio are hybrid ARMs which have an
interest rate that is fixed for an initial period of time, generally three to
five years, which then converts to an adjustable rate for the balance of the
term of the loan. Many ARMs are indexed to the one-year constant maturity
treasury ("CMT") rate with interest rates that are reset annually. Other ARMs
are indexed to the London Interbank Offered Rate ("LIBOR"), the six-month
certificate of deposit rate, the six-month CMT rate or the 11th District Cost
of Funds Index. ARMs that are indexed to the CMT are generally subject to a
limitation on the amount of the annual interest rate change. This limit is
usually 1% or 2% per year. Generally, all ARMS have lifetime limits on
interest rate increases over the initial interest rate. In general, such
lifetime interest rate caps do not exceed 600 basis points over the initial
interest rate.

While the Company's principal investment strategy, as described above, is to
acquire mortgages and mortgage-backed securities financed through the use of
leverage, upon consummation of the Merger, the Company acquired all of the
assets of the PREP Funds. The PREP Funds were in a different business from
that of the Company. The PREP Funds were formed to provide construction and
permanent financing for apartment complexes and retirement living facilities.
The PREP Funds provided this financing by making equity investments as a
limited partner in the limited partnerships that owned these apartment
complexes and retirement living facilities and by making loans to such limited
partnerships that were secured by first mortgages on these apartment
complexes. In order to reduce the risk of these investments, each of the
loans originated by the PREP Funds was made in the form of a mortgage-backed
security that was insured or guaranteed as to principal and interest by an
agency of the U.S. government, such as FHA or GNMA. In addition, the PREP
Funds acquired mortgage-backed securities backed by pools of single-family
mortgages that were insured or guaranteed by GNMA, FNMA or FHLMC.

FINANCING STRATEGY

The Company intends to finance the acquisition of additional mortgages and
mortgage-backed securities by borrowing against its portfolio of mortgage
assets and investing the proceeds of the borrowings in additional mortgage
assets. The Company does not currently intend to publicly offer additional
shares of its common stock or other debt or equity securities. When fully
invested, the Company plans to maintain an equity-to-assets ratio of
approximately 8% to 10%. The equity-to-assets ratio was approximately 13% as
of December 31, 1999.

The Company's borrowings are financed primarily at short-term borrowing
rates through the utilization of repurchase agreements. A repurchase
agreement, although structured as a sale and repurchase obligation, operates
as a financing under which the Company effectively pledges its
mortgage assets as collateral to secure a short-term loan which is equal in
value to a specified percentage of the market value of the pledged collateral.



Repurchase agreements take the form of a sale of the pledged collateral to a
lender at an agreed upon price in return for such lender's simultaneous
agreement to resell the same securities back to the borrower at a future date
(the maturity of the borrowing) at a higher price. The price difference is
the cost of borrowing under these agreements. The Company will retain
beneficial ownership of the pledged collateral, including the right to
distributions. At the maturity of a repurchase agreement, the Company will be
required to repay the loan and concurrently will receive back its pledged
collateral from the lender or will rollover such agreement at the then
prevailing financing rate. The repurchase agreements may require the Company
to pledge additional assets to the lender in the event the market value of any
existing pledged collateral declines. To date, the Company has not had any
significant margin calls on its repurchase agreements that were related to a
decrease in the market value of its collateral.

Repurchase agreements tend to be short-term in nature. Should the providers
of the repurchase agreements decide not to renew, the Company must either
refinance these obligations prior to maturity or be in a position to retire
the obligations. If, during the term of a repurchase agreement, a lender
should file for bankruptcy, the Company might experience difficulty recovering
its pledged assets and may have an unsecured claim against the lender's assets.

To reduce its exposure, the Company enters into repurchase agreements only
with financially sound institutions whose holding or parent company's
long-term debt rating is single A or better as determined by both Standard and
Poor's and Moody's, where applicable. If this minimum criterion is not met,
then the Company will not enter into repurchase agreements with such
counterparty without the specific approval of its Board of Directors. In the
event an existing counterparty is downgraded below single A, the Company will
seek Board approval before entering into additional repurchase agreements with
such counterparty. In addition, once the Company is fully invested, it
intends to enter into repurchase agreements with at least four lenders with a
maximum exposure to each lender of three times the Company's shareholders'
equity. As of December 31, 1999, the Company had repurchase agreements with
nine lenders with a maximum exposure to any one lender of not more than 1.8
times the Company's shareholders' equity.

RISK FACTORS

The results of the Company's operations are affected by various factors, many
of which are beyond the control of the Company. The results of the Company's
operations depend on, among other things, the level of net interest income
generated by the Company's mortgage assets, the market value of its assets and
the supply of and demand for such assets. The Company's net interest income
varies primarily as a result of changes in short-term interest rates,
borrowing costs and prepayment rates, the behavior of which involves various
risks and uncertainties as set forth below. Prepayment rates, interest rates
and borrowing costs depend on the specific type of asset, conditions in
financial markets, competition and other factors, none of which can be
predicted with any certainty. Since changes in interest rates may
significantly affect the Company's activities, the operating results of the
Company depend, in large part, upon the ability of the Company to effectively
manage its interest rate and prepayment risks while maintaining its status as
a REIT.

INTEREST RATE RISKS

The Company has financed the acquisition of additional mortgage assets through
borrowings under numerous repurchase agreements. As a result, the Company is
exposed to the following principal interest rate risks:

The cost of the Company's borrowings under its repurchase agreements is
based on the prevailing short-term market rates that adjust over periods
of one to 12 months. However, a substantial majority of the Company's
mortgage assets have either fixed interest rates or interest rates that
reset only every six to 12 months. At December 31, 1999, the repricing
gap between the Company's assets and obligations was approximately 11
months.

There is no limitation on the interest rate that the Company could have
to pay in order to borrow money to finance its mortgage assets. However,
the ability to raise interest rates on its assets is limited, either
because such rates are fixed for the life of the asset or, in the case of
ARMs, the ability to raise interest rates is limited on both an annual


basis and over the term of the ARM. Generally, interest rates on ARMs
can change a maximum of 100 or 200 basis points per annum and only up to
600 basis points from the initial interest rate over the term of the ARM.

The cost of the Company's borrowings is generally based on LIBOR while
interest rates on its ARM portfolio are primarily based on one-year CMT
rates. Therefore, any increase in the LIBOR relative to the CMT rates
will result in an increase in the Company's borrowing cost that is not
matched by a corresponding increase in the interest earnings on its ARM
portfolio.

In any of these cases, increasing short-term interest rates may cause the
Company's financing costs to increase faster than it is able to increase
interest rates on its ARMs. As a result, the net interest margin earned by
the Company will be reduced or eliminated during such periods. Accordingly,
in a period of increasing interest rates, the Company could experience a
decrease in net interest income or a net loss because the interest rates on
borrowings could adjust faster than the interest rates on the Company's ARMs.
Such a decrease in the Company's net interest income could negatively impact
the level of dividend distributions made by the Company and reduce the market
price of its common stock.

In order to mitigate its interest rate risks, the Company intends to have a
substantial majority of its mortgage assets consist of ARMs rather than fixed
rate mortgages. This allows the Company to increase its interest income
during periods of rising interest rates. While the lag in its ability to reset
interest rates on its ARMs portfolio relative to changes in the interest rates
it pays on its liabilities and the annual and lifetime limitations on
adjustments to interest rates on ARMs can negatively affect earnings over the
short term, the ability to make interest rate adjustments on the ARMs does
help mitigate this risk over a longer time period.

The Company's policy is to maintain an asset/borrowings repricing gap (as
measured by the average time period to assets repricing, less the average time
period to liability repricing) at less than 24 months when its leverage ratio
is less than 5 to 1 and at less than 18 months when its leverage ratio is
greater than 5 to 1. At December 31, 1999, the Company's leverage ratio
equaled 7.76 to 1 and the repricing gap stood at approximately 11 months. For
purposes of this analysis, equity assets and zero coupon Treasury securities
and assets of comparable duration purchased as a hedge against prepayments are
excluded from the calculation.

As discussed above, the relationship between LIBOR and the CMT can change over
time. At December 31, 1999, the one-year LIBOR was 6.5% and the one-year CMT
was 5.96%. However, as of December 31, 1999, the average interest rate on the
Company's CMT based ARMs was 195 basis points over the CMT. Therefore, the
LIBOR index would have to increase by approximately 65 basis points relative
to the CMT in order to eliminate the positive spread between the yield on
these ARMs and the Company's cost of borrowing. During 1999, the largest
differential between the one-year LIBOR and one-year CMT was 90 basis points
and the average differential was 64 basis points.

Lifetime interest rate caps on ARMs could impact the earnings on the Company's
assets. However, based on the assets available in the current market, such an
impact should only occur if the one-month LIBOR rate increased to
approximately 10%. This rate was 5.83% at December 31, 1999. Periodic caps
could also have an impact on the earnings of the Company's assets. At
December 31, 1999, approximately 44% of the Company's adjustable rate
mortgages and 37% of the total assets had a 1% periodic cap. The impact of
periodic caps, if any, would be slight since the weighted average coupon of
these assets equals 7.51% (175 basis points greater than the one-year CMT.)
The Company may attempt to partially offset the potential negative effect of
lifetime and periodic maximum interest rates on its ARMs through the purchase
of interest rate caps on its liabilities. An interest rate cap agreement is a
contractual agreement whereby the Company pays a fee in exchange for the right
to receive payments equal to the difference between a contractually specified
interest rate and a periodically determined future interest rate times a
specified principal, or notional amount. Such interest rate cap agreements
are subject to the risk that the other party to the agreement will not be able
to perform its obligations. Although the Company would seek to enter interest
rate agreements only with financially sound institutions and to monitor the
financial strength of such institutions on a periodic basis, no assurance can
be given that the Company can avoid such third party risks. As of December
31, 1999, the Company had not utilized this hedging strategy.


As a part of its hedging strategy, the Company may engage in limited amounts
of the buying and selling of mortgage derivative securities or other
derivative products including interest rate swap agreements, financial futures
contracts and options. Although the Company and its Predecessor have not
historically used such instruments, it is not precluded from doing so. In the
future, management anticipates using such instruments only as hedges to manage
interest rate risk. Management does not anticipate entering into derivatives
for speculative or trading purposes. Any such strategies will be selected by
the Advisor and approved by the Company's investment committee. While the
Company may hedge certain risks associated with interest rate increases, no
hedging strategy can insulate the Company completely from interest rate
risks. In addition, there can be no assurance that any such hedging
activities will have the desired impact on the Company's results of operations
or financial condition. Hedging typically involves costs, including
transaction costs, which increase dramatically as the period covered by the
hedge increases and which also increase during periods of rising or volatile
interest rates. Such hedging costs may cause the Company to conclude that a
particular hedging transaction is not appropriate for the Company, thereby
affecting the Company's ability to mitigate interest rate risk. As of
December 31, 1999, the Company had not entered into any interest rate hedging
agreements.

PREPAYMENT RISKS

In general, the borrower under a mortgage loan may prepay the loan at any time
without penalty or premium. Prepayments result when a homeowner sells his
home or decides to either retire or refinance his existing mortgage loan. In
addition, defaults and foreclosures have the same effect as a prepayment in
that no future interest payments are earned on the mortgage. Prepayments
usually can be expected to increase when mortgage interest rates decrease
significantly and decrease when mortgage interest rates increase, although
such effects are not entirely predictable. Prepayment experience also may be
affected by the conditions in the housing and financial markets, general
economic conditions and the relative interest rates on fixed-rate and
adjustable-rate mortgage loans. During 1999, prepayments generally slowed due
to an increase in mortgage interest rates and a widening of the short-term and
long-term interest rate spread.

Prepayments are the primary feature of mortgage-backed securities that
distinguishes them from other types of bonds. While a certain percentage of
the pool of mortgage loans underlying a mortgage-backed security are expected
to prepay during a given period of time, the actual rate of prepayment can,
and often does, vary significantly from the anticipated rate of prepayment.
Accordingly, the Company incurs a risk that its mortgage assets will prepay at
a more rapid pace than anticipated. The potential negative impact on the
Company of prepayments is twofold. In the first instance, prepayments reduce
the amount of the Company's interest earning assets. In addition, if the
Company has paid more than par for a mortgage-backed security, the premium is
amortized against earnings over the life of the security. Higher than
expected prepayments lead to an increase in premium amortization, which
reduces the Company's earnings.

One way the Company seeks to reduce its exposure to prepayment risk is to
purchase mortgage assets trading closer to par and thus reduce the Company's
earnings exposure resulting from amortization of premiums. In the current
marketplace, ARM securities are trading at 96% to 104% of par depending on
seasoning and the interest rate. The Company's current policy is to maintain
the average purchase price of the Company's mortgage portfolio at less than
103.5% of par. The Company's weighted average purchase price for the mortgage
assets it acquired in 1999 and 1998 were approximately 101.7% and 101.5% of
par, respectively. Another way the Company seeks to address this risk is to
use less leverage in less advantageous market environments. While this
strategy may not maximize earnings potential in the short term, it should lead
to more predictable earnings with less potential risk to capital.

The Company seeks to minimize prepayment risk through a number of other means,
including structuring a diversified portfolio with a variety of prepayment
characteristics. An additional natural hedge to prepayment risk is for the
Company to maintain a position in direct investments (mezzanine or equity) in
multifamily properties collateralizing mortgage loans owned by the Company.
These assets do not face prepayment risk and should increase in value in a
declining interest rate environment where prepayments would have the largest
negative impact. Another potential hedge for the Company is to hold zero
coupon Treasury securities or other assets of long duration which increase in


value when interest rates decline. As of December 31, 1999, the Company did
not own any zero coupon Treasury securities. No strategy, however, can
completely insulate the Company from prepayment risks arising from the effects
of interest rate changes.

RISKS ASSOCIATED WITH LEVERAGE

The Company's financing strategy is designed to increase the size of its
mortgage investment portfolio by borrowing a substantial portion of the market
value of its mortgage assets. If the interest income on the mortgage assets
purchased with borrowed funds fails to cover the cost of the borrowings, the
Company will experience net interest losses and may experience net losses.
Such losses could be increased substantially as a result of the Company's
substantial leverage.

The ability of the Company to achieve its investment objectives depends on its
ability to borrow money in sufficient amounts and on favorable terms.
Currently, all of the Company's borrowings are collateralized borrowings in
the form of repurchase agreements. The ability of the Company to enter into
repurchase agreements in the future will depend on the market value of the
mortgage assets pledged to secure the specific borrowings, the availability of
financing, and other conditions then applicable in the lending market. The
Company may effect additional borrowings through the use of other types of
collateralized borrowings, loan agreements, lines of credit, dollar-roll
agreements and other credit facilities with institutional lenders or through
the issuance of debt securities. The cost of borrowings under repurchase
agreements generally corresponds to LIBOR plus or minus a margin, although
such agreements may not expressly incorporate a LIBOR index. The cost of
borrowings under other sources of funding which the Company may use may refer
or correspond to other short-term indices, plus or minus a margin. Through
increases in haircuts (i.e., the over-collateralization amount required by a
lender), decreases in the market value of the Company's mortgage assets,
increases in interest rate volatility, and changes in the availability of
financing in the market, the Company may not be able to achieve the degree of
leverage it believes to be optimal. As a result, the Company may be less
profitable than it would be otherwise.

RISKS OF DECLINE IN MARKET VALUE

The value of interest-bearing obligations such as mortgages and
mortgage-backed securities may move inversely with interest rates.
Accordingly, in a rising interest rate environment, the value of such
instruments may decline. Because the interest earned on ARMs may increase as
interest rates increase subject to a delay until each such security's next
reset date, the values of these assets are generally less sensitive to changes
in interest rates than are fixed-rate instruments. Therefore, in order to
mitigate this risk, the Company intends to maintain a substantial majority of
its mortgage assets as ARMs. At December 31, 1999, ARMs constituted
approximately 93% of the Company's total mortgage assets.

A decline in the market value of the Company's mortgage assets may limit the
Company's ability to borrow or result in lenders initiating margin calls
(i.e., requiring a pledge of cash or additional mortgage assets to
re-establish the ratio of the amount of the borrowing to the value of the
collateral). The Company could be required to sell mortgage assets under
adverse market conditions in order to maintain liquidity. If these sales were
made at prices lower than the amortized cost of the mortgage assets, the
Company would experience losses. A default by the Company under its
collateralized borrowings could also result in a liquidation of the
collateral, and a resulting loss of the difference between the value of the
collateral and the amount borrowed.

Additionally, in the event of a bankruptcy of the Company, certain repurchase
agreements may qualify for special treatment under the Bankruptcy Code, the
effect of which is, among other things, to allow the creditors under such
agreements to avoid the automatic stay provisions of the Bankruptcy Code and
to liquidate the collateral under such agreements without delay. To the
extent the Company is compelled to liquidate mortgage assets qualifying as
Qualified REIT Real Estate Assets to repay borrowings, the Company may be
unable to comply with the REIT provisions of the Internal Revenue Code
regarding assets and sources of income requirements, ultimately jeopardizing
the Company's status as a REIT.

The value of the Company's other investments, such as corporate debt and


equity securities, is also subject to fluctuation due to changes in interest
rates and many other factors.

CREDIT RISKS ASSOCIATED WITH INVESTMENTS

The holder of a mortgage or mortgage-backed security assumes a risk that the
borrowers may default on their obligations to make full and timely payments of
principal and interest. The Company seeks to mitigate this risk of credit
loss by requiring that at least 70% of its investment portfolio consist of
mortgage or mortgage securities that are either (i) insured or guaranteed as
to principal and interest by an agency of the U.S. government, such as GNMA,
FNMA or FHLMC, (ii) rated in one of the two highest rating categories by
either Standard and Poor's or Moody's, or (iii) considered to be of equivalent
credit quality as determined by the Advisor and approved by the Company's
investment committee. The remainder of the Company's assets may be either (i)
mortgage assets rated at least investment grade or considered to be of
equivalent credit quality by the Advisor with approval from the Company's
investment committee; (ii) direct investment (mezzanine or equity) in
multifamily projects collateralizing mortgage loans owned by the Company;
(iii) investments in limited partnerships, real estate investment trusts or
closed-end funds owning a portfolio of mortgage assets; or (iv) other
fixed-income instruments (corporate or government) that provide increased call
protection relative to the Company's mortgage assets. Currently, these other
fixed-income instruments are below investment grade in quality. These other
below investment grade fixed-income instruments constituted less than 3% of
the Company's total assets as of December 31, 1999. As of December 31, 1999,
approximately 79% of the Company's assets consisted of mortgage-backed
securities insured or guaranteed by the U.S. government or an agency thereof.

RISKS OF ASSET CONCENTRATION

Although the Company seeks geographic diversification of the properties
underlying its mortgage assets, it does not set specific limitations on the
aggregate percentage of underlying properties which may be located in any one
area. Consequently, properties underlying such mortgage assets may be located
in the same or a limited number of geographical regions. Adverse changes in
the economic conditions of the geographic regions in which the properties
securing mortgage assets are concentrated likely would have an adverse effect
on real estate values, interest rates and prepayment rates and increase the
risk of default by the obligors on the underlying mortgage loans.
Accordingly, the Company's results of operations could be adversely affected.

INVESTMENT COMPANY ACT

The Company at all times intends to conduct its business so as to not become
regulated as an investment company under the Investment Company Act of 1940.
If the Company were to become regulated as an investment company, then, among
other things, the Company's ability to use leverage would be substantially
reduced. 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" (i.e. "Qualifying Interests").
Under the current interpretation of the staff of the SEC, in order to qualify
for this exemption, the Company must maintain at least 55% of its assets
directly in Qualifying Interests. In addition, unless certain mortgage
securities represent an undivided interest in the entire pool backing such
mortgage securities (i.e. "whole pool" mortgage securities), such mortgage
securities may be treated as securities separate from the underlying mortgage
loan, thus, may not be considered Qualifying Interests for purposes of the 55%
exemption requirement. Accordingly, the Company monitors its compliance with
this requirement in order to maintain its exempt status. As of December 31,
1999, the Company determined that it is in and has maintained compliance with
this requirement.

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes certain federal income tax considerations
to the Company and its stockholders. This discussion is based on existing
federal income tax law, which is subject to change, possibly retroactively.
This discussion does not address all aspects of federal income taxation that
may be relevant to a particular stockholder in light of its personal
investment circumstances or to certain types of investors subject to special
treatment under the federal income tax laws (including financial institutions,
insurance companies, broker-dealers and, except to the extent discussed below,
tax-exempt entities and foreign taxpayers) and it does not discuss any aspects


of state, local or foreign tax law. This discussion assumes that stockholders
will hold their common stock as a "capital asset" (generally, property held
for investment) under the Internal Revenue Code of 1986, as amended (the
"Code"). Stockholders are advised to consult their tax advisors as to the
specific tax consequences to them of purchasing, holding and disposing of the
common stock, including the application and effect of federal, state, local
and foreign income and other tax laws.

GENERAL

The Company has elected to become subject to tax as a REIT, for federal income
tax purposes, commencing with the taxable year ending December 31, 1998.
Management currently expects that the Company will continue to operate in a
manner that will permit the Company to maintain its qualifications as a REIT.
This treatment will permit the Company to deduct dividend distributions to its
stockholders for federal income tax purposes, thus effectively eliminating the
"double taxation" that generally results when a corporation earns income and
distributes that income to its stockholders. There can be no assurance that
the Company will continue to qualify as a REIT in any particular taxable year,
given the highly complex nature of the rules governing REITs, the ongoing
importance of factual determinations and the possibility of future changes in
the circumstances of the Company. If the Company failed to qualify as a REIT
in any particular year, it would be subject to federal income tax as a
regular, domestic corporation, and its stockholders would be subject to tax in
the same manner as stockholders of such corporation. In this event, the
Company could be subject to potentially substantial income tax liability in
respect of each taxable year that it fails to qualify as a REIT, and the
amount of earnings and cash available for distribution to its stockholders
could be significantly reduced or eliminated. The following is a brief
summary of certain technical requirements that the Company must meet on an
ongoing basis in order to qualify, and remain qualified, as a REIT under the
Code.

STOCK OWNERSHIP TESTS

The capital stock of the Company must be held by at least 100 persons and no
more than 50% of the value of such capital stock may be owned, directly or
indirectly, by five or fewer individuals at all times during the last half of
the taxable year. Under the Code, most tax-exempt entities including employee
benefit trusts and charitable trusts (but excluding trusts described in 401(a)
and exempt under 501(a)) are generally treated as individuals for these
purposes. These stock ownership requirements must be satisfied by the Company
each taxable year. The Company must solicit information from certain of its
shareholders to verify ownership levels and its Articles of Incorporation
provide restrictions regarding the transfer of the Company's shares in order
to aid in meeting the stock ownership requirements. If the Company were to
fail either of the stock ownership tests, it would generally be disqualified
from REIT status, unless, in the case of the "five or fewer" requirement, the
recently enacted "good faith" exemption is available.

ASSET TESTS

The Company must generally meet the following asset tests (the "REIT Asset
Tests") at the close of each quarter of each taxable year: (a) at least 75% of
the value of the Company's total assets must consist of Qualified REIT Real
Estate Assets, government securities, cash, and cash items (the "75% Asset
Test"); and (b) the value of securities held by the Company, but not taken into
account for purposes of the 75% Asset Test, must not exceed (i) 5% of the value
of the Company's total assets in the case of securities of any one
non-government issuer, and (ii) 10% of the outstanding voting securities of
any such issuer.

The Company does not expect that the value of any non-qualifying security of
any one entity would ever exceed 5% of the Company's total assets, and the
Company does not expect to own more than 10% of any one issuer's voting
securities. The Company intends to monitor closely the purchase, holding and
disposition of its assets in order to comply with the REIT Asset Tests. In
particular, the Company intends to limit and diversify its ownership of any
assets not qualifying as Qualified REIT Real Estate Assets to less than 25% of
the value of the Company's assets and to less than 5%, by value, of any single
issuer. If it is anticipated that these limits would be exceeded, the Company
intends to take appropriate measures, including the disposition of
non-qualifying assets, to avoid exceeding such limits.



GROSS INCOME TESTS

The Company must generally meet the following gross income tests (the "REIT
Gross Income Tests") for each taxable year: (a) at least 75% of the Company's
gross income must be derived from certain specified real estate sources
including interest income and gain from the disposition of Qualified REIT Real
Estate Assets or "qualified temporary investment income" (i.e., income derived
from "new capital" within one year of the receipt of such capital) (the "75%
Gross Income Test") and; (b) at least 95% of the Company's gross income for
each taxable year must be derived from sources of income qualifying for the
75% Gross Income Test, or from dividends, interest, and gains from the sale of
stock or other securities (including certain interest rate swap and cap
agreements, options, futures and forward contracts 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 (the "95% Gross Income Test").

The Company intends to maintain its REIT status by carefully monitoring its
income, including income from liability hedging transactions and sales of
mortgage assets, to comply with the REIT Gross Income Tests. In particular,
the Company will treat income generated by its interest rate caps and other
liability hedging instruments, if any, as non-qualifying income for purposes
of the 95% Gross Income Tests unless it receives advice from counsel that such
income constitutes qualifying income for purposes of such test. Under certain
circumstances, for example, (i) the sale of a substantial amount of mortgage
assets to repay borrowings in the event that other credit is unavailable or
(ii) unanticipated decrease in the qualifying income of the Company which may
result in the non-qualifying income exceeding 5% of gross income, the Company
may be unable to comply with certain of the REIT Gross Income Tests. See
"Taxation of the Company" below for a discussion of the tax consequences of
failure to comply with the REIT Provisions of the Code.

DISTRIBUTION REQUIREMENT

The Company must generally distribute to its stockholders an amount equal to
at least 95% of the Company's REIT taxable income before deductions of
dividends paid and excluding net capital gain.

TAXATION OF THE COMPANY

In any year in which the Company qualifies as a REIT, the Company will
generally not be subject to federal income tax on that portion of its REIT
taxable income or capital gain which is distributed to its stockholders. The
Company will, however, be subject to federal income tax at normal corporate
income tax rates upon any undistributed taxable income or capital gain.
Notwithstanding its qualification as a REIT, the Company may also be subject
to tax in certain other circumstances. If the Company fails to satisfy either
the 75% or the 95% Gross Income Test, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
generally be subject to a 100% tax on the greater of the amount by which the
Company fails either the 75% or the 95% Gross Income Test multiplied by net
income and divided by gross income. The Company will also be subject to a tax
of 100% on net income derived from any "prohibited transaction," and if the
Company has (i) 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 (ii) other non-qualifying income from foreclosure property, it
will be subject to federal income tax on such income at the highest corporate
income tax rate. In addition, if the Company fails to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year and (ii) 95% of its REIT capital gain net income for such year, the
Company would be subject to a 4% federal excise tax on the excess of such
required distribution over the amounts actually distributed during the taxable
year, plus any undistributed amount of ordinary and capital gain net income
from the preceding taxable year. The Company may also be subject to the
corporate alternative minimum tax, as well as other taxes in certain
situations not presently contemplated. If the Company fails to qualify as a
REIT in any taxable year, and certain relief provisions of the Code do not
apply, the Company would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at the regular
corporate income tax rates. Distributions to stockholders in any year in
which the Company fails to qualify as a REIT would not be deductible by the
Company, nor would they generally be required to be made under the Code.
Further, unless entitled to relief under certain other provisions of the Code,
the Company would also be disqualified from re-electing REIT status for the
four taxable years following the year in which it became disqualified.


The Company intends to monitor on an ongoing basis its compliance with the
REIT requirements described above. In order to maintain its REIT status, the
Company will be required to limit the types of assets that the Company might
otherwise acquire, or hold certain assets at times when the Company might
otherwise have determined that the sale or other disposition of such assets
would have been more prudent.

TAXATION OF STOCKHOLDERS

Distributions (including constructive distributions) made to holders of common
stock other than tax-exempt entities (and not designated as capital gain
dividends) will generally be subject to tax as ordinary income to the extent
of the Company's current and accumulated earnings and profits as determined
for federal income tax purposes. If the amount distributed exceeds a
stockholder's allocable share of such earnings and profits, the excess will be
treated as a return of capital to the extent of the stockholder's adjusted
basis in the common stock, which will not be subject to tax, and thereafter as
a taxable gain from the sale or exchange of a capital asset.

Distributions designated by the Company as capital gain dividends will
generally be subject to tax as long-term capital gain to stockholders, to the
extent that the distribution does not exceed the Company's actual net capital
gain for the taxable year. Distributions by the Company, whether
characterized as ordinary income or as capital gain, are not eligible for the
corporate dividends received deduction. In the event that the Company realizes
a loss for the taxable year, stockholders will not be permitted to deduct any
share of that loss.

STATE AND LOCAL TAXES

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

COMPETITION

The Company believes that its principal competitors in the business of
acquiring and holding mortgage assets of the type in which it invests are
financial institutions such as banks and savings and loans, life insurance
companies, institutional investors such as mutual funds and pension funds, and
certain mortgage REITs. Such investors may not be subject to similar
regulatory constraints (i.e. REIT tax compliance or maintaining 1940 Act
exemption). In addition, many of the other entities purchasing mortgages and
mortgage-backed securities have greater financial resources and better access
to capital than the Company. The existence of these competitive entities, as
well as the possibility of additional entities forming in the future, may
increase the competition for the acquisition of mortgages and mortgage-backed
securities resulting in higher prices and lower yields on such assets.

Item 2. Properties. The Company does not directly own or lease any physical
properties.

Item 3. Legal Proceedings. There are no material pending legal proceedings
to which the Company or any of its assets are subject.

Item 4. Submission of Matters to a Vote of Security Holders. No matter was
submitted during the fourth quarter of the fiscal year ending December 31,
1999, to a vote of the Company's security holders.














Executive Officers of the Company.
The Company's executive officers are as follows: