SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant /x/
Filed by a Party other than the Registrant / /

Check the appropriate box:

AMERICA FIRST MORTGAGE INVESTMENTS, INC.
(Name of Registrant as specified in its Charter)
(Name of Person(s) filing proxy statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

CALCULATION OF FILING FEE

(1)

Estimated solely for the purpose of computing the amount of the filing fee pursuant to Rule 0-11(c)(1)(i) under the Securities Exchange Act of 1934, as amended. Estimate is based on average of high and low sale prices of the Registrant's common stock as reported on the New York Stock Exchange on October 4, 2001 pursuant to Rule 0-11(a)(1) under such Act.

1)

Amount previously paid:

2)

Form, Schedule or Registration Statement No.:

3)

Filing Party:

4)

Date Filed:

November 12, 2001

Dear Stockholder:

    You are cordially invited to attend the special meeting of stockholders of America First Mortgage Investments, Inc., which will be held on December 12, 2001 at 9:30 a.m. local time, at the Four Seasons Hotel, 57 East 57^th Street, New York, New York 10022. Enclosed for your review are the proxy, proxy statement and notice of meeting for a special meeting of stockholders.

    At the special meeting, you will be asked to consider and vote upon a proposal (the "Merger Proposal") to approve the issuance of shares of our common stock pursuant to, and the other transactions contemplated by, an Agreement and Plan of Merger, dated as of September 24, 2001 (the "Merger Agreement"), among our company, America First Mortgage Advisory Corporation, a Maryland corporation and our external manager (the "Manager"), America First Companies L.L.C., a Delaware limited liability company and the principal stockholder of the Manager ("AFC"), and the other stockholders of the Manager (the "Manager Stockholders"). Pursuant to the Merger Agreement, the Manager will merge with and into our company, and we will become a self-advised real estate investment trust ("REIT"). Under the Merger Agreement, we will issue 1,287,501 shares of our common stock to the owners of the Manager.

    Since our inception, we have engaged the Manager to provide us, under the supervision of our Board of Directors, with management, advisory and other services. The consummation of the Merger would result in the discontinuance of the Manager and the existing advisory agreement with the Manager and allow us to become a self-advised REIT.

    The Merger Proposal is conditioned upon, among other things, the affirmative vote of a majority of the shares of our common stock voting at the special meeting of stockholders where the total vote cast represents over 50% of all of our outstanding shares of common stock entitled to vote on the Merger Proposal. Tucker Anthony Sutro Capital Markets ("Tucker") has rendered an opinion to a special committee of our Board of Directors (the "Special Committee"), which consisted of three of our independent directors who have no personal interest in the Merger, that the consideration to be paid by us to AFC and the Manager Stockholders is fair, from a financial point of view, to our company and our stockholders. Based on this fairness opinion and other considerations, the Special Committee has unanimously recommended to our Board of Directors that it approve the Merger Proposal.

    After careful consideration and advisement from the Special Committee, the Board of Directors (with the independent directors approving under a separate vote) has approved the Merger Proposal. The Board of Directors and the Special Committee believe that the terms of the Merger Proposal are fair to, and in the best interest of, our company and our stockholders. The Board recommends that you vote "FOR" the Merger Proposal.

    The Merger Proposal (as well as certain conflicts of interest that are involved in light of the affiliation between our company and the Manager) and other matters referred to above are more completely described in the accompanying Proxy Statement. We urge you to carefully review the Proxy Statement and accompanying appendices, which discuss the Merger Proposal in more detail. A copy of the Merger Agreement (without exhibits) and a copy of Tucker's fairness opinion are attached as Appendices A and B, respectively, to the accompanying Proxy Statement.

    We appreciate the support of our stockholders as we pursue our goal of becoming one of the leading mortgage REITs in the industry. We hope that after reading the accompanying materials, you will continue to support our objectives by voting "FOR" the Merger Proposal.

    Your vote is important to us, whether you own few or many shares. Please complete, date and sign the enclosed proxy card and return it in the accompanying postage paid envelope, even if you plan to attend the special meeting. If you attend the special meeting, you may, if you wish, withdraw your proxy and vote in person.

		Sincerely,
		Stewart Zimmerman
		Chief Executive Officer

Questions and requests for assistance in voting your shares may be directed to Georgeson Shareholder Communications, Inc., which is assisting us with the solicitation of proxies, toll free at 800-223-2064.

AMERICA FIRST MORTGAGE INVESTMENTS, INC.
399 Park Avenue
36th Floor
New York, New York 10022

NOTICE OF SPECIAL MEETING TO BE HELD ON
December 12, 2001

To the Stockholders of
America First Mortgage Investments, Inc.

    NOTICE IS HEREBY GIVEN that a special meeting of stockholders of America First Mortgage Investments, Inc., a Maryland corporation, will be held on December 12, 2001 at 9:30 a.m., local time, at the Four Seasons Hotel, 57 East 57^th Street, New York, New York 10022, for the following purposes:

    1.  to consider and vote upon a proposal to approve the issuance of shares of our common stock pursuant to, and the other transactions contemplated by, an Agreement and Plan of Merger, dated as of September 24, 2001, among our company, America First Mortgage Advisory Corporation, our external manager, America First Companies L.L.C., the principal stockholder of the Manager, and the other stockholders of the Manager; and

    2.  to transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

    The merger proposal is more fully described in the accompanying Proxy Statement and appendices thereto, which form a part of this notice.

    The Board of Directors has fixed the close of business on November 9, 2001 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting or adjournment or postponement thereof. Only stockholders of record on the record date will be entitled to notice of, and to vote at, the special meeting or any adjournments or postponements thereof. A list of such stockholders will be available for inspection by any stockholder or his, her or its attorney or agent at our offices at 399 Park Avenue, 36th Floor, New York, New York 10022, at least ten days prior to the special meeting.

    Whether or not you plan to attend the special meeting, please execute, date and return promptly the enclosed proxy. A return envelope is enclosed for your convenience and requires no postage for mailing in the United States. Please note that, by delivering a proxy to vote at the special meeting, you are also granting a proxy voting in favor of any adjournments or postponements of the special meeting. If you are present at the special meeting you may, if you wish, withdraw your proxy and vote in person. You may also revoke your proxy at any time before the meeting either in writing or by notifying us. Thank you for your interest and consideration.

				By Order of the Board of Directors,
				Ronald A. Freydberg Secretary

November 12, 2001

YOUR VOTE IS IMPORTANT. TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.

AMERICA FIRST MORTGAGE INVESTMENTS, INC.
399 Park Avenue
36th Floor
New York, New York 10022
SPECIAL MEETING OF STOCKHOLDERS
December 12, 2001
PROXY STATEMENT

   This Proxy Statement is being furnished to our stockholders in connection with the solicitation of proxies by our Board of Directors for use at the special meeting of stockholders to be held on December 12, 2001 at 9:30 a.m. local time at the Four Seasons Hotel, 57 East 57^th Street, New York, New York 10022, and any adjournments or postponements thereof.

   At the special meeting, our stockholders of record as of the close of business on November 9, 2001 (the "Record Date") will be asked to consider and vote upon a proposal (the "Merger Proposal") to approve the issuance of shares of our common stock pursuant to, and the other transactions contemplated by, an Agreement and Plan of Merger dated as of September 24, 2001 (the "Merger Agreement"), among our company, America First Mortgage Advisory Corporation, a Maryland corporation and our external manager (the "Manager"), America First Companies L.L.C., a Delaware limited liability company and the principal stockholder of the Manager ("AFC"), and the other stockholders of the Manager (the "Manager Stockholders"). Pursuant to the Merger Agreement, the Manager will merge (the "Merger") with and into our company and we will become a self-advised real estate investment trust ("REIT"). Upon consummation of the Merger, the outstanding shares of common stock, par value $0.01 share, of the Manager (the "Manager Common Stock") will be converted into an aggregate of 1,287,501 shares of our common stock, par value $.01 per share.

   Because the proposed Merger is between affiliated parties and the members of our negotiating team as well as certain interlocking directors have conflicts of interest in connection therewith, our Board of Directors established a special committee of our Board of Directors (the "Special Committee"), which consisted of three of our independent directors who have no personal interest in the Merger, to direct the negotiations relating to the Merger on our behalf and to consider and make recommendations to our Board of Directors relating to the Merger Proposal. For a description of these conflicts, see "Risk Factors— Conflicts of Interest" and "The Merger Proposal—Conflicts of Interest."

   After careful consideration and advisement by the Special Committee, the Board of Directors (with the independent directors approving under a separate vote) has approved the Merger Proposal. The Board of Directors and the Special Committee believe that the terms of the Merger Proposal are fair to, and in the best interest of, our company and our stockholders. The Board of Directors recommends that you vote "FOR" the Merger Proposal.

   Our common stock is traded on the New York Stock Exchange under the symbol "MFA." On September 21, 2001 (the last full trading date prior to the announcement of the proposed Merger), the last reported sale price for our common stock on the NYSE was $7.80 per share. On November 8, 2001, the last reported sale price for our common stock on the NYSE was $7.84.

   No person is authorized to make any representation with respect to the matters described in this Proxy Statement other than those contained herein, and if given or made, such information or representation must not be relied upon as having been authorized by our company, the Manager, AFC, the Manager Stockholders or any other person. This Proxy Statement provides you with detailed information about the proposed transactions. We encourage you to read this document carefully.

   See "Risk Factors" on page 18 for a discussion of certain factors which should be considered in evaluating the Merger Proposal.

   This Proxy Statement and the accompanying form of proxy are first being mailed or delivered to our stockholders on or about November 12, 2001.

   The date of this Proxy Statement is November 12, 2001.

TABLE OF CONTENTS

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ii

INTRODUCTION

    This Proxy Statement is being furnished to holders of shares of our common stock in connection with the solicitation of proxies by our Board of Directors for use at a special meeting of stockholders (the "Special Meeting") to be held on December 12, 2001 at 9:30 a.m. local time at the Four Seasons Hotel, 57 East 57^th Street, New York, New York 10022, and any adjournments or postponements of that meeting. The purpose of the Special Meeting is for our stockholders to consider and vote upon a proposal (the "Merger Proposal") to approve the issuance of shares of our common stock pursuant to, and the other transactions contemplated by, an Agreement and Plan of Merger, dated as of September 24, 2001 (the "Merger Agreement"), among our company, America First Mortgage Advisory Corporation (the "Manager"), a Maryland corporation, our external manager and a majority-owned subsidiary of America First Companies L.L.C. ("AFC"), AFC and the other stockholders of the Manager (the "Manager Stockholders"). Pursuant to the Merger Agreement, the Manager will merge (the "Merger") with and into our company and we will become a self-advised real estate investment trust ("REIT"). All references to "we," "us," "our company" or the "Company" refer to America First Mortgage Investments, Inc., a Maryland corporation. Our Board of Directors has fixed the close of business on November 9, 2001 as the record date (the "Record Date") for the Special Meeting. Accordingly, only stockholders of record on that date will be entitled to notice of, and to vote at, the special meeting.

Q:

Why has the Merger been proposed?

A:

When we began operations in 1998, our Board of Directors determined that the size and scope of our business operations were insufficient to support the overhead associated with a self-advised structure. Accordingly, we have relied on the Manager and its affiliates to provide all personnel, utilities, equipment and supplies, insurance, accounting, administrative and other support services, office facilities and other items necessary for our business operations. Since that time, we have dramatically increased our equity base and asset size. In June 2001, we raised $67.1 million in net proceeds of new equity capital. Since then, we have invested all of the net proceeds thereof. Additionally, in November 2001, we raised $59.7 million in net proceeds of new equity capital. As a result of this growth in our capital base, our Board of Directors believes that our business operations have now achieved adequate size and scope to support internalization of these services. While the externally-advised structure made sense for our original operations, it is not a typical way to operate a public corporation. As a result, we believe that public equity investors and market analysts view us less favorably than they would if we were a self-advised company. We believe that this unfavorable perception will make it difficult for us to successfully raise further equity capital in the public securities markets. If we are not able to raise more equity capital, our ability to grow will be severely hampered. Therefore, we believe that becoming a self-advised REIT is critical to the long-term success of our company.

In addition, we believe that the stock valuations for self-advised companies are generally higher than those of externally-advised companies, all other things being equal. While there can be no assurance that the conversion to a self-advised structure would increase the market price of our stock, we believe that remaining externally-advised will have a negative effect on our stock price over the long-term.

We also expect that the Merger will increase our earnings per share on a prospective basis given current market conditions. While there can be no assurance that the Merger will be accretive to our earnings per share, the elimination of the anticipated fees payable to the Manager (which have recently increased due to the investment of the net proceeds from the June 2001 equity offering and which will further increase when we fully invest the net proceeds from our November 2001 equity offering) as a result of the Merger is expected to more than offset the estimated costs associated with being a self-advised company and the dilutive effect of the additional shares of common stock to be issued in the Merger. The positive impact on our earnings per share would

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increase further if we raise additional equity capital and invest the proceeds thereof in the future because a portion of the Manager's fee is based directly on the amount of our stockholders' equity and on our net asset value.

Q:

Why do you not just terminate the Advisory Agreement with the Manager?

A:

While we have the right to terminate the advisory agreement with the Manager, there are a number of reasons why our Board of Directors did not believe this to be in our best interest. The termination of the advisory agreement prior to its term, or the failure to renew it after its term ends, obligates us to pay the Manager a termination fee. The amount of this fee is to be determined by an independent appraisal. Further, the fee would be payable in cash which would reduce the amount of funds that we have available for investment. In addition, by terminating the advisory agreement with the Manager, we would risk losing the services of our current management team since these individuals are employees of the Manager and are subject to employment contracts with the Manager. These individuals are a highly experienced management team that has successfully led us from our inception, and our Board of Directors believes that they would be very difficult to replace, especially in the short-term. By acquiring the Manager, we avoid any discontinuity to our business as these individuals will automatically become our employees and will agree to modifications to their employment agreements that provide, among other things, certain non-competition covenants. Additionally, by issuing stock to our current management team in connection with the Merger, we will further align their interest with those of our other stockholders.

Q:

What is the effect of the Merger Proposal?

A:

Upon completion of the proposed Merger, the Manager will be merged with and into our company. As a result, we will become a self-advised REIT and will perform all the functions that the Manager previously performed for us. We will, however, continue to use another affiliate of AFC to manage our six multifamily apartment properties which represent less than 1% of our assets. We will issue a total of 1,287,501 shares of our common stock to the stockholders of the Manager.

Q:

How was the value of the Manager determined?

A:

The value of the Manager and the terms of the Merger Proposal were determined through negotiation between the Manager and a special committee of our Board of Directors (the "Special Committee"), which consisted of three of our independent directors who have no personal interest in the Merger.

Because the stockholders of the Manager are our affiliates, the Special Committee retained Tucker Anthony Sutro Capital Markets ("Tucker") to issue an opinion that the consideration to be paid by us pursuant to the Merger is fair, from a financial point of view, to our company and our stockholders.

Q:

What vote is required to approve the Merger Proposal?

A:

Approval of the Merger Proposal requires the affirmative vote of a majority of the votes cast by holders of our common stock, provided that the total votes cast represents over 50% of our outstanding common stock. If there are not enough votes to establish a quorum or to meet this voting requirement at the Special Meeting, we may propose an adjournment or postponement of the Special Meeting for the purpose of soliciting additional proxies. Therefore, please note that, by delivering a proxy to vote at the Special Meeting, you are also granting a proxy that can be voted in favor of any adjournments or postponements of this Special Meeting.

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Q:

What rights do I have if I oppose the Merger Proposal?

A:

You can vote against the Merger Proposal by indicating a vote against the Merger Proposal on your proxy card and by signing and mailing your proxy card, or by voting against the Merger Proposal in person at the Special Meeting. You are not, however, entitled to dissenters' or appraisal rights under Maryland law.

Q:

When do you expect the Merger to be completed?

A:

We hope to complete the Merger as quickly as possible after the Special Meeting.

Q:

What do I need to do now?

A:

After reading this Proxy Statement, just complete, sign and mail the enclosed proxy card in the enclosed return envelope as soon as possible. Even if you plan to attend the Special Meeting in person, we urge you to return your proxy card to assure the representation of your shares at the Special Meeting.

Q:

If my shares are held in "street name" by my broker, will my broker vote my shares for me?

A:

Your broker will vote your shares only if you provide instructions to your broker on how to vote. You should contact your broker and ask what directions your broker will need from you. Your broker will not be able to vote your shares without instructions from you.

Q:

Can I change my vote after I have mailed my signed proxy card?

A:

Yes. You can change your vote at any time before your proxy is voted at the Special Meeting. You can do this in one of three ways. First, you can send us a written notice stating that you revoke your proxy. Second, you can complete and submit a new proxy card, dated a later date than the first proxy card. Third, you can attend the Special Meeting and vote in person. Your attendance at the Special Meeting will not, however, by itself revoke your proxy. If you hold your shares in "street name" and have instructed your broker to vote your shares, you must follow directions received from your broker to change those instructions.

Q:

How does the Board of Directors recommend that I vote?

A:

After careful consideration and advisement by the Special Committee, our Board of Directors recommends that you vote "FOR" approval of the issuance of shares of our common stock pursuant to, and the other transactions contemplated by, the Merger Agreement.

Q:

Who can help answer my questions?

A:

If you would like additional copies of this document, or if you would like to ask any additional questions about the Merger Proposal, you should contact:

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SUMMARY TERM SHEET

    The following is a summary of the material terms of the Merger Proposal as described in this Proxy Statement. You should carefully read this entire document as well as the additional documents to which it refers for a more complete description of the Merger Proposal.

•  The Special Meeting

•

General—This Proxy Statement is being furnished to our stockholders for use at the Special Meeting in connection with the approval of the issuance of 1,287,501 shares of our common stock pursuant to, and the other transactions contemplated by, the Merger Agreement. The Merger Agreement contemplates the merger of the Manager with and into our company and that we become a self-advised REIT as a result thereof. The Special Meeting will be held on December 12, 2001 at 9:30 a.m. local time at the Four Seasons Hotel, 57 East 57^th Street, New York, New York 10022. See "The Special Meeting—General."



•

Vote Required—Approval of the Merger Proposal requires the affirmative vote of a majority of the votes cast by holders of our common stock, provided that the total votes cast represents over 50% of our outstanding common stock. See "The Special Meeting—Vote Required."



•

Record Date—Only holders of record of shares of our common stock as of the close of business on November 9, 2001 are entitled to notice of, and to vote at, the Special Meeting. See "The Special Meeting—Record Date; Shares Entitled to Vote."

•  The Merger Proposal

    At the Special Meeting, holders of shares of our common stock will be asked to consider and vote upon a proposal to approve the issuance of 1,287,501 shares of our common stock pursuant to, and the other transactions contemplated by, the Merger Agreement.

•

Parties to the Merger



•

America First Mortgage Investments, Inc.—We invest in adjustable-rate mortgage-backed securities that we acquire in the secondary market.



•

America First Mortgage Advisory Corporation—The Manager manages our day-to-day operations and advises us on various facets of our business under an advisory agreement.

•

Effect of the Merger—Upon the closing of the Merger, we will become a self-advised REIT and will cease to pay any fees under the advisory agreement. Based on current market conditions, we believe that the Merger will be accretive to our earnings per share on a prospective basis. However, as a result of becoming a self-advised REIT, we will incur additional administrative and other expenses.



•

Our Board of Directors recommends that you vote for the Merger Proposal—After careful consideration and advisement from the Special Committee, our Board of Directors approved the Merger Proposal and determined that the Merger Proposal is fair to, and in the best interests of, our company and our stockholders. Our Board of Directors recommends that you vote "FOR" the Merger Proposal. See "The Merger Proposal—Background—Reasons for the Merger and—Recommendations of the Special Committee and the Board of Directors."



•

Financial Advisor Opinion—The Special Committee retained Tucker Anthony Sutro Capital Markets to act as its financial advisor and to deliver a written opinion as to the fairness, from a financial point of view, to our company and our stockholders of the consideration to be paid by our company to AFC and the Manager Stockholders in the Merger. Tucker delivered its written opinion to the Special Committee to the effect that the consideration to be paid by us pursuant

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to the Merger Agreement is fair, from a financial point of view, to our company and our stockholders. "The Merger Proposal—Opinion of the Financial Advisor to the Special Committee."

•

Interests of Directors and Officers—Some of our officers and directors have interests and arrangements that may be different from, or in addition to, your interests as stockholders. See "Risk Factors—Conflicts of Interest" and "The Merger Proposal—Conflicts of Interest."



•

Indemnification—In the Merger Agreement, our company, AFC and the Manager Stockholders have agreed, subject to certain limitations, to indemnify each other for damages arising from certain matters following the Effective Time. See "The Merger Agreement—Indemnification."



•

Registration Rights Agreement—The shares of our common stock to be issued pursuant to the Merger Agreement will not be registered under the Securities Act of 1933, as amended. In connection with the Merger, our company, AFC and the Manager Stockholders will enter into a registration rights agreement with respect to such shares. See "The Merger Agreement—Registration Rights."



•

Tax Treatment of the Merger—We believe that the Merger will constitute a tax-free reorganization for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). See "Federal Income Tax Considerations—Tax Treatment of the Merger."

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SUMMARY OF THE PROXY STATEMENT

    This summary highlights some information from this Proxy Statement. Because it is a summary, it does not contain all of the information that you should consider in making your decision as to how to vote your shares. You should read the entire Proxy Statement carefully, including the section entitled "Risk Factors" and the summary and pro forma financial statements and the related notes to those statements included in this Proxy Statement.

The Special Meeting

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Recommendation to our Stockholders

    After careful consideration and advisement by the Special Committee, the Board of Directors (with the independent directors approving under a separate vote) has approved the Merger Proposal. The Board of Directors and the Special Committee believe that the terms of the Merger Proposal are fair to, and in the best interest of, our company and our stockholders. The Board of Directors recommends that you vote "FOR" the Merger Proposal.

Deadlines for Stockholder Proposals

    The deadline for submitting stockholder proposals for inclusion in our proxy statement for our annual meeting is December 14, 2001.

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SELECTED FINANCIAL DATA

    The operating data for the years ended December 31, 1998, 1999 and 2000 and the balance sheet data as of December 31, 1999 and 2000 are derived from our financial statements and notes thereto included elsewhere in this Proxy Statement and which have been audited by PricewaterhouseCoopers LLP, our independent auditors. On April 9, 1998, we merged with America First Participating/Preferred Equity Mortgage Fund Limited Partnership ("Prep Fund 1") and America First PREP Fund 2 Limited Partnership ("Prep Fund 2") and acquired 99% of the limited partner interests in America First PREP Fund 2 Pension Series Limited Partnership (the "Pension Fund," and collectively with Prep Fund 1 and Prep Fund 2, the "PREP Funds"). Operating data for the year ended December 31, 1998 reflect the combined operating data of our company and PREP Fund 1 through the date of such merger and of our company after the date of such merger. No operating data for PREP Fund 2 and Pension Fund is included in our operating data for the period prior to April 9, 1998 because PREP Fund 1 is treated as our sole predecessor for accounting purposes. Operating data for the years ended December 31, 1997 and 1996 and the balance sheet data as of December 31, 1996, 1997 and 1998 are derived from financial statements of our company and PREP Fund 1 that are not included in this Proxy Statement. Operating data for the years ended December 31, 1997 and 1996 are the operating data of PREP Fund 1. Balance sheet data as of December 31, 1998 is that of our company. Balance sheet data as of December 31, 1997 is that of our company and PREP Fund 1. Balance sheet data as of December 31, 1996 is that of PREP Fund 1. The operating data for the nine months ended September 30, 2000 and 2001, and the balance sheet data as of September 30, 2001 are derived from our unaudited financial statements and notes thereto included elsewhere in this Proxy Statement. The following selected financial data should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this Proxy Statement and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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⁽¹⁾

Includes income of approximately $2,600,000 resulting from the sale of an undivided interest in the net assets of an assisted living center as described in Note 6 to our unaudited financial statements for the nine months ended September 30, 2001 under "Financial Information."

⁽²⁾

Includes an incentive advisory fee of approximately $511,000 earned by the Manager in connection with the sale described in (1) above

⁽³⁾

Includes income of approximately $2,600,000 resulting from the sale of the underlying real estate of an unconsolidated real estate limited partnership as described in Note 6 to our audited financial statements for the year ended December 31, 2000 under "Financial Information."

⁽⁴⁾

Includes an incentive advisory fee of approximately $519,000 earned by the Manager in connection with the sale described in (3) above.

⁽⁵⁾

Includes income of approximately $2,163,000 resulting from the sale of undivided interests in the net assets of four assisted living centers as described in Note 6 to our audited financial statements for the year ended December 31, 2000 under "Financial Information."

⁽⁶⁾

Includes an incentive advisory fee of approximately $433,000 earned by the Manager in connection with the sale described in (5) above.

⁽⁷⁾

Included in 1998 income is net income of $486,466 relating to the operations for the period from January 1, 1998 through our merger with the Prep Funds on April 9, 1998. The income for the applicable periods is reflected in the per share and exchangeable unit information, as applicable.

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UNAUDITED SUMMARY SELECTED PRO FORMA FINANCIAL DATA

    The following tables set forth our selected financial data on a pro forma basis after giving effect for the Merger. The unaudited pro forma operating data for the nine months ended September 30, 2001 (assuming completion of the transaction) and for the year ended December 31, 2000 (assuming completion of the transaction) is presented as if the transaction had occurred on January 1, 2000. The unaudited pro forma balance sheet as of September 30, 2001 (assuming completion of the transaction) is presented as if the transaction had occurred on September 30, 2001.

    The pro forma information is based upon assumptions that are included in the notes to the pro forma financial statements included elsewhere in this Proxy Statement. The pro forma information is unaudited and is not necessarily indicative of what our financial position and results of operations would have been as of and for the dates or periods indicated, nor does it purport to represent the future financial position and results of operations for future dates or periods.

    As more fully discussed in "Managements Discussion and Analysis of Financial Condition and Results of Operations," on June 27, 2001 we completed a $67.1 million equity offering.

Unaudited Company Pro Forma
Summary Selected Financial Data

⁽¹⁾

Does not give effect to the November 2001 equity offering.

⁽²⁾

Included in the pro forma results of operations are gains of approximately $2,600,000 in each of the nine month period ended September 30, 2001 and the year ended December 31, 2000. Excluding the effects of these gains, the pro forma operating results would have been $0.76 basic and $0.76 diluted per share for the nine month period ended September 30, 2001 and $0.53 basic and $0.53 diluted per share for the year ended December 31, 2000, respectively.

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MARKET INFORMATION

The Company

    Our common stock currently is listed on the NYSE under the symbol "MFA" and began trading on the NYSE on April 10, 1998. The table below sets forth, for the fiscal periods indicated, the high and low sale prices per share of our common stock on the NYSE and the distributions declared relating to such periods.

    On September 21, 2001, the last full trading day prior to announcement of the proposed Merger, the last reported NYSE sale price per share of our common stock was $7.80. On November 8, 2001, the last reported NYSE sale price per share of our common stock was $7.84.

    Holders of shares of our common stock are entitled to receive distributions when, as and if declared by our Board of Directors out of any assets legally available for payment. In order to maintain our status as a REIT under the Code, we are required to distribute annually to our stockholders at least 90% of our "REIT Taxable Income," which is generally defined as taxable income from operations (net of depreciation deductions), excluding gains from the sale of properties.

The Manager

    There is no public market for shares of the Manager's common stock. As of the date hereof, AFC was the principal holder of the Manager's common stock.

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RISK FACTORS

    The following factors should be considered carefully by our stockholders in connection with voting upon the Merger Proposal and the transactions contemplated thereby.

The Parties Negotiating the Terms of the Merger Proposal have Conflicts of Interest.

    Certain of our directors and executive officers who were involved in discussions and negotiations relating to the Merger Proposal have interests in connection with the Merger Proposal that are in addition to, or conflict with, our company and our stockholders. In particular, our executive officers, Messrs. Zimmerman, Gorin and Freydberg, are employees of, and in the aggregate own 20% of, the Manager. Mr. Michael B. Yanney, our Chairman of the Board of Directors, and Mr. George H. Krauss, one of our directors, beneficially own approximately 57% and 17%, respectively, of AFC, which owns 80% of the Manager. In addition, Messrs. Zimmerman and Gorin own, in the aggregate, approximately 3% of AFC. Therefore, the Merger will result in these individuals receiving, in the aggregate, beneficial ownership of an additional 1,287,501 shares of our common stock as a result of the consummation of the Merger.

    As of November 9, 2001, our executive officers and directors beneficially owned approximately 2.9% of our issued and outstanding shares of our common stock and Messrs. Yanney, Zimmerman, Gorin, Freydberg and Krauss beneficially owned approximately 2.8%. Following the issuance of the shares of our common stock in the Merger, such individuals will beneficially own approximately 7.1%. As a result of such increased ownership, they could exert greater influence on our company and would represent a higher percentage of the vote for any action requiring stockholder approval. These individuals have all indicated that they will vote in favor of the Merger Proposal.

    In addition, the Merger Proposal will result in an increase in the salaries of Messrs. Zimmerman, Gorin and Freydberg and the establishment of a minimum bonus pool for them at the time we assume their employment contracts. See "The Merger Agreement—Employee Matters." Accordingly, these individuals have an economic interest in the completion of the Merger that may be in conflict with our interests or those of our stockholders. See "Risk Factors—Conflicts of Interest" and "The Merger Proposal—Conflicts of Interest."

    As a result, the Merger Proposal may not be considered to have been negotiated in a completely arm's-length manner. Although our Board of Directors established the Special Committee to ensure that the Merger Proposal would be considered by persons who did not have any conflicts of interest in the Merger, there can be no assurance that the terms of the Merger Proposal are the same as would have been obtained in negotiations between unrelated parties. See "The Merger Proposal—Background and—Conflicts of Interest."

    Each of Tucker, who acted as financial advisor to the Special Committee, and FBR, who conducted an appraisal of the Manager on behalf of the Manager, co-managed our common stock offerings which were completed on June 27, 2001 and November 7, 2001, respectively, and may in the future, from time to time, provide us with investment banking, financial advisory and other services for which they may earn a fee.

Our Earnings per Share may Decrease as a Result of the Merger.

    We cannot assure you that the cost savings we anticipate from no longer paying the base and incentive advisory fees to the Manager will offset the additional expenses that we will incur as a self-advised REIT. These additional expenses will include all of the salaries and benefits of our executive officers and the other employees we will need to operate our company after the Merger. Even if our earnings are not adversely affected, our earnings per share may decrease because we will be issuing additional shares of our common stock as Merger Consideration. These additional shares will

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represent approximately 4.5% of the total number of shares outstanding after the Merger. If the Merger is not completed, the amount of the base and incentive advisory fees payable to the Manager will depend on a number of factors, including the amount of additional equity, if any, that we are able to raise and the profitability of our business. Therefore, the exact amount of future fees that we would pay to the Manager cannot be predicted with complete accuracy. If the expenses we assume are higher than we anticipate or the fees payable in the future to the Manager would have been lower than we anticipate, our net income per share may decrease as a result of the Merger. If we had completed the Merger as of January 1, 2001, our pro forma earnings per share for the year ended September 30, 2001 would have been marginally higher than our actual earnings per share for those periods. See "Pro Forma Financial Information."

    However, we recently completed equity offerings with net proceeds of approximately $67.1 million and $59.7 million (assuming the underwriter's overallotment is not exercised) on June 27, 2001 and November 7, 2001, respectively. These offerings have substantially increased our equity base and, through the investment of the net proceeds thereof, the scope of our investment operations, which are the determinitive factors upon which the Manager currently receives its base and incentive advisory fees. Because of the timing of those offerings, their impact on the overall fees to the Manager is not fully reflected in the historical results of operations upon which the pro forma financial information is based. As a consequence, based on current fee levels and market conditions, we anticipate that the Merger will be more accretive to our earnings per share on a prospective basis as compared to earnings per share from continuing operations under the terms of the existing advisory agreement than is reflected in the pro forma historical results contained in this proxy statement. Similar economies of scale are anticipated to arise from any additional offerings and resultant expansion of operations which we may complete. However, there can be no assurance that such offerings will be completed or that market conditions would not adversely change.

The Merger will Reduce our Book Value per Share.

    The issuance of 1,287,501 additional shares in the Merger will increase the number of our shares of common stock outstanding without increasing our net worth. As a result, the pro forma book value per share as of September 30, 2001, as also adjusted for the effects of our common stock offering we completed as of November 7, 2001 (assuming the underwriter's allotment is not exercised), will decline by $0.39 per share and current stockholders will experience a 5.0% dilution of their current ownership interest in our company.

The Number of Shares we Issue in the Merger will not Change to Reflect Changes in the Relative Value of our Company and the Manager after the Date the Merger Agreement was Signed.

    The number of shares of our common stock that we will issue in the Merger is fixed. Therefore, it will not be reduced even if the market price of our common stock increases after the date the Merger Agreement was signed. Likewise, it will not be reduced even if the value of the Manager goes down after that date. The relative value of our company may change because of the financial or other results of our company, changes in the economic sector in which our company operates, changes in economic conditions generally and other factors that might affect the business, condition and prospects of our company.

    Furthermore, we do not intend to obtain an updated fairness opinion from Tucker. Changes in the operations and prospects of our company and the Manager, general market and economic conditions and other factors which are beyond our control, on which the opinion of Tucker is based, may have altered the relative value of the companies after the date of the original fairness opinion.

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The Merger may Cause Us to Lose Our REIT Status for Tax Purposes.

    In order to maintain our status as a REIT for federal income tax purposes, we are not permitted to have current or accumulated earnings and profits carried over from the Manager. If the IRS successfully asserts that we acquired current or accumulated earnings and profits from the Manager and failed to distribute, during the taxable year in which the Merger occurs, all of such earnings and profits, we would lose our REIT qualification for the year of the Merger, as well as any other taxable years during which we held such acquired earnings and profits, unless, in the year of such determination, we make an additional distribution of the amount of earnings and profits determined to be acquired from the Manager. In order to make such an additional distribution, we could be required to borrow funds or sell assets even if prevailing market conditions were not generally favorable. For any taxable year that we fail to qualify as a REIT, we would not be entitled to a deduction for dividends paid to our stockholders in calculating our taxable income. Consequently, our net assets and distributions to our stockholders would be substantially reduced because of our increased tax liability. Furthermore, to the extent that distributions had been made in anticipation of our qualification as a REIT, we might also be required to borrow additional funds or to liquidate certain of our investments in order to pay the applicable tax on our income. See "Federal Income Tax Considerations—Consequences of Merger on Our Qualification as a REIT—Earnings and Profits Distribution Requirement."

    We will obtain a study from PricewaterhouseCoopers LLP to determine whether the Manager, as of the date of the Merger, would otherwise have current or accumulated earnings and profits. Based on such study, and subject to the assumptions and qualifications contained therein, we anticipate that as of the Effective Time the Manager will not have any current or accumulated earnings and profits, although there can be no assurance of this.

We may Lose Certain Intangible Benefits from Being Associated with AFC.

    Since our inception, the Manager has handled our day-to-day operations. We believe that we have realized benefits from AFC's mortgage banking experience, management expertise and capital markets presence. Although we and AFC will continue to have certain interlocking directors and ongoing arrangements and AFC will become a more significant stockholder of our company as contemplated by the Merger Agreement, our association with AFC may become less certain as a result of the Merger. Accordingly, we may lose some or all of the intangible benefits previously enjoyed from our relationship with AFC. In addition, once we become self-advised, certain contractual remedies that we might have asserted against our Manager for failure to perform its obligations under the advisory agreement will not longer be available to us.

After the Merger we will be Dependent on our own Executives and Employees.

    As an externally-advised company, we rely on the Manager to provide us with all personnel necessary for the operation of our business. As a result, the services of the Manager's employees, as well as the employees of AFC, are available to us. After the Merger, we will rely on our own employees to operate our business, and will not be able to rely on employees of the Manager and AFC. As a result, we will depend on a smaller group of executive officers and employees to operate our business after the Merger. Accordingly, the loss of the services of any key employee, particularly one of our executive officers, may have a negative effect on our business operations.

After the Merger we will be Subject to Potential Liability as an Employer.

    At present, we do not directly employ any employees or maintain any benefit or retirement plans. As a result of the Merger, we will directly employ persons who are currently employees of the Manager and will establish certain retirement and other employee benefit plans. As an employer, we will be subject to those potential liabilities that are commonly faced by employers, such as workers' disability

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and compensation claims, potential labor disputes and other employee-related liabilities and grievances and we will bear the costs of the establishment and maintenance of such plans.

The Issuance of our Shares in Connection with the Merger may be Subject to Registration Under Securities Laws.

    We do not intend to register the shares of our common stock to be issued in the Merger under federal securities laws and will rely on an exemption for sales not involving a public offering. If the issuance of our shares in the Merger is considered to be a part of the same plan of financing as the issuance of shares in our November 2001 equity offering, or is otherwise deemed to be integrated into the offering, then this exemption for a non-public offering may not be available to us. This may result in the stockholders of the Manager having a right to rescind the shares issued in the Merger in exchange for cash, which would reduce our capital and cash available for investment.

The Recent Terrorist Attacks in the United States may have a Negative Effect on our Earnings.

    The terrorist attacks which occurred in New York City and Washington, D.C. on September 11, 2001, and the subsequent military actions taken by the United States and its allies in response, have caused significant uncertainty in the global financial markets. While the short-term and long-term effects of these events and their potential consequences are uncertain, they could have a material adverse effect on general economic conditions, consumer confidence and market liquidity. Among other things, it is possible that short-term interest rates may be affected by these events. If short-term interest rates increase rapidly, it would cause our borrowing costs to increase faster than increases in the interest rates we earn on our adjustable rate mortgage-backed securities. If that were to happen, our earnings would be negatively affected. In addition, the rate of prepayment on the mortgages underlying our mortgage-backed securities could increase as a result of adverse economic conditions, changes in interest rates and other factors, all of which could be affected by the events of September 11, 2001 and their aftermath.

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FORWARD-LOOKING STATEMENTS

    This Proxy Statement contains or incorporates by reference certain forward-looking statements. When used, statements which are not historical in nature, including those containing words such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, including those relating to:

•

increases in the prepayment rates on the mortgage loans securing our mortgage-backed securities;



•

changes in short-term interest rates;



•

the costs associated with operating our business both prior to and following the Merger;



•

our ability to use borrowings to finance our assets;



•

risks associated with investing in real estate, including changes in business conditions and the general economy;



•

changes in government regulations affecting our business; and



•

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

    Other risks, uncertainties and factors, including those discussed under "Risk Factors" in this Proxy Statement or described in reports that we file from time to time with the Securities and Exchange Commission (the "SEC"), such as our Forms 10-K and 10-Q, could cause our actual results to differ materially from those projected in any forward-looking statements we make. We are not obligated to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

    You should rely only on the information contained in or incorporated by reference into this Proxy Statement. We have not 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 Proxy Statement is current as of the date of this Proxy Statement. Our business, financial condition, results of operations and prospects may have changed since such date.

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THE SPECIAL MEETING

General

    This Proxy Statement is being furnished to holders of shares of our common stock in connection with the solicitation of proxies by our Board of Directors for use at the Special Meeting to be held on December 12, 2001, 9:30 a.m., local time, at the Four Seasons Hotel, 57 East 57^th Street, New York, New York 10022, and at any adjournment or postponement thereof. This Proxy Statement, the attached Notice of the Special Meeting and the accompanying form of proxy are first being mailed to holders of shares of our common stock on or about November 12, 2001.

Matters to be Considered

    At the Special Meeting, holders of record of shares of our common stock will consider and vote upon:

•

the issuance of common stock pursuant to, and the other transactions contemplated by, the Merger Agreement; and



•

such other business as may properly come before the Special Meeting or any adjournment or postponement thereof.

Recommendations of the Board of Directors

    After careful consideration and advisement by the Special Committee, the Board of Directors (with the independent directors approving under a separate vote) has approved the Merger Proposal and has concluded that the Merger Proposal is fair to, and in the best interests of, our company and our stockholders. The Board of Directors recommends that our stockholders vote "FOR" approval of the Merger Proposal. For further information, see "The Merger Proposal—Reasons for the Merger and—Recommendations of the Special Committee and the Board of Directors."

Record Date; Shares Entitled to Vote; Quorum

    The Board of Directors has fixed the close of business on November 9, 2001 as the record date for determining the holders of shares of our common stock who are entitled to notice of, and to vote at, the Special Meeting. As of the Record Date, 27,034,850 shares of our common stock were outstanding and held of record by approximately 408 stockholders. The holders of record on the Record Date of shares of our common stock are entitled to one vote per share of our common stock. Pursuant to our Bylaws and the MGCL, the presence of the holders of shares representing a majority of the outstanding shares of our common stock entitled to vote, whether in person or by properly executed proxy, is necessary to constitute a quorum for the transaction of business at the Special Meeting. "Broker non-votes" (i.e., proxies from brokers or nominees indicating that such persons have not received instructions from the beneficial owner or other persons entitled to vote shares as to a matter with respect to which the brokers or nominees do not have discretionary power to vote) will be treated as not present and not entitled to vote for purposes of determining the presence of a quorum. Abstentions will be treated as present and entitled to vote for purposes of determining the presence of a quorum but will not be counted as a vote cast.

Proxies; Proxy Solicitation

    Shares of our common stock represented by properly executed proxies received at or prior to the Special Meeting that have not been revoked will be voted at the Special Meeting in accordance with the instructions indicated on the proxies. Shares of our common stock represented by properly executed proxies for which no instruction is given will be voted "FOR" approval of the Merger Proposal.

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Stockholders are requested to complete, sign, date and promptly return the enclosed proxy card in the postage-prepaid envelope provided for this purpose to ensure that their shares are voted.

    Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by:

•

filing with our Secretary, at or before the taking of the vote at the Special Meeting, a written notice of revocation bearing a later date than the proxy;



•

duly executing a later dated proxy relating to the same shares of our common stock and delivering it to our Secretary before the taking of the vote at the Special Meeting; or



•

attending the Special Meeting and voting in person (although attendance at the Special Meeting will not in and of itself constitute a revocation of a proxy).

    Any written notice of revocation or subsequent proxy should be sent so as to be delivered to America First Mortgage Investments, Inc., 399 Park Avenue, New York, New York 10022, Attention: Corporate Secretary, or hand delivered to our Secretary or his representative at or before the taking of the vote at the Special Meeting.

    If the Special Meeting is postponed or adjourned for any reason, all proxies will be voted at the reconvened meeting in the same manner as such proxies would have been voted at the original convening of the Special Meeting (except for any proxies that have theretofore effectively been revoked or withdrawn), notwithstanding that they may have been effectively voted on the same or any other matter at a previous meeting.

    Stockholders are urged to mark the box on the proxy card to indicate how their shares are to be voted. If a stockholder returns a signed proxy card but does not indicate how their shares are to be voted, the shares represented by the proxy card will be voted "FOR" the Merger Proposal. The proxy card also confers discretionary authority on the individuals appointed by our Board of Directors and named on the proxy card to vote the shares represented thereby on any other matter that is properly presented for action at the Special Meeting, including any adjournments of the Special Meeting.

    We will bear the cost of soliciting proxies from our stockholders. We will pay Georgeson Shareholder Communications, Inc. ("Georgeson") a fee of $7,500 to cover its services in soliciting the forwarding and return of proxy material. In addition, we will reimburse Georgeson for out-of-pocket expenses incurred in connection therewith. In addition to solicitation by mail, our directors, officers and employees may solicit proxies by telephone, telegram, e-mail communication or otherwise. Such directors, officers and employees will not be additionally compensated for such solicitation, but may be reimbursed for out-of-pocket expenses incurred in connection therewith. Brokerage firms, fiduciaries and other custodians who forward soliciting material to the beneficial owners of shares of our common stock held of record by them will be reimbursed for their reasonable expenses incurred in forwarding

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such material. Any questions or requests for assistance regarding this Proxy Statement and related proxy materials may be directed to:

Vote Required

    The Merger Proposal.  Neither the MGCL nor our Articles of Incorporation or Bylaws require us to obtain stockholder approval of the Merger Proposal. However, NYSE policies require stockholder approval of the Merger Proposal, and such requirement will be satisfied if the Merger Proposal is approved by the affirmative vote of a majority of the votes cast by holders of our common stock, provided that the total votes cast represents over 50% of our outstanding common stock. Abstentions will not be counted as a vote cast. In the event that stockholders approve the Merger Proposal and the transaction is subsequently challenged in a derivative action, we may be entitled under Maryland law to assert stockholder approval as a defense to such action. If stockholders do not approve the Merger Proposal at the Special Meeting, we may consider alternative ways in which we can restructure the relationship between us and the Manager.

    All Other Matters.  Each other matter to be voted upon at the Special Meeting requires the affirmative vote of a majority of the votes present or represented by proxy at the Special Meeting and entitled to vote thereon.

Dissenters' Rights of Appraisal

    Under Maryland law, holders of shares of our common stock will not be entitled to dissenters' rights of appraisal in connection with the Merger.

Effects of Abstentions and Broker Non-Votes

    For purposes of determining approval of the Merger Proposal to be presented at the Special Meeting, abstentions will be treated as present and entitled to vote but will not be counted as a vote cast. Broker Non-Votes will be treated as not present and not entitled to vote at the Special Meeting.

Independent Accountants

    It is currently expected that representatives of PricewaterhouseCoopers LLP, our independent accountants, will be present at the Special Meeting, where they will have the opportunity to make a statement if they so decide and will be available to respond to appropriate questions.

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THE MERGER PROPOSAL

America First Mortgage Investments, Inc.

    We were incorporated in Maryland on July 24, 1997, and began our business operations on April 10, 1998 when we consummated a merger transaction with PREP Fund 1, PREP Fund 2 and the Pension Fund. As a result of this merger, PREP Fund 1 and PREP Fund 2 were merged into us and the Pension Fund became our partnership subsidiary. We issued a total of 9,035,084 shares of our common stock to former partners of the PREP Funds in connection with such merger. We subsequently dissolved and liquidated the Pension Fund and acquired approximately 99% of its assets.

    We invest in adjustable-rate mortgage-backed securities that we acquire in the secondary market. These mortgage-backed securities are secured by pools of mortgage loans on single-family residences. Our investment policy requires that at least 50% of our assets consist of adjustable-rate mortgage-backed securities that have principal and interest that is guaranteed by an agency of the United States government such as the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. We are not in the business of originating mortgage loans or providing other types of financing to the owners of real estate.

    We also invest in multifamily housing properties and currently own interests in six apartment properties containing a total of 1,473 rental units which represents less than 1% of our assets. In addition, we own interests in publicly-traded equity and debt securities issued by real estate investment trusts, real estate limited partnerships and other companies, not all of which are in the real estate industry. As of September 30, 2001, these non-mortgage assets represented less than 2% of our total assets. An affiliate of AFC serves as the property manager of our multifamily apartment properties pursuant to property management contracts. We expect to continue to use such affiliate as our property manager following the Merger. Such contracts are terminable by us on 30 days written notice.

    We are currently an externally-advised REIT and have no employees of our own. We entered into an advisory agreement with the Manager, America First Mortgage Advisory Corporation in April 1998. At the time we commenced operations, our Board of Directors did not believe that the size and scope of our business operations and business activities were sufficient to support a self-advised structure. Accordingly, we have relied on the Manager and its affiliates to provide all personnel, utilities, equipment and supplies, insurance, accounting, administrative and other support services, office facilities and other items necessary for our business operations. Since that time, we have dramatically increased our equity base and asset size. In June 2001, we raised $67.1 million in net proceeds of new equity capital. Since then, we have invested all of the net proceeds thereof. Additionally, in November 2001, we raised $59.7 million in net proceeds of new equity capital. As a result of this growth in our capital base, our Board of Directors believes that our business operations have now achieved adequate size and scope to support internalization of these services. Additionally, for the reasons outlined herein, this structure will facilitate both short-term and long-term benefits to our stockholders.

    If the Merger Proposal is approved, our company will no longer pay any of the advisory fees but will pay directly for the overhead necessary to provide the services that the Manager currently provides to us under the advisory agreement.

America First Mortgage Advisory Corporation

    The Manager was incorporated in Maryland on April 3, 1998. The principal business address of the Manager is 1004 Farnam Street, Suite 400, Omaha, Nebraska 68102.

    The Manager entered into an advisory agreement with us under which it manages our investments and performs various administrative services for us in connection with the operation of our business. The advisory agreement has a five-year term ending in April 2003, but may be extended for additional one-year terms by the mutual agreement of the Manager and our Board of Directors, including a

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majority of our independent directors. If we elect to terminate or not renew our advisory agreement with the Manager for reasons other than the Manager's breach of the agreement or due to bankruptcy or similar proceedings affecting the Manager, then we must pay the Manager a termination fee. Under the advisory agreement, the amount of this fee is determined based on an appraisal from an independent party jointly selected by us and the Manager. The terms of the advisory agreement are described in greater detail under "Advisory Agreement."

    We pay the Manager an advisory fee equal to 1.10% per annum of the first $300 million of stockholders' equity plus 0.80% per annum of the portion of our stockholders' equity above $300 million. This advisory fee is paid on a monthly basis. We also pay the Manager, on a quarterly basis, an incentive advisory fee of 20% of the amount by which our return on our equity for each quarter exceeds a return based on the ten-year U.S. Treasury Rate plus 1%. Fees payable to the Manager under the advisory agreement are the Manager's only source of revenue. For the years ended December 31, 1998 (partial year), 1999 and 2000 and for the period January 1, 2001 through September 30, 2001, the base advisory fees amounted to $590,815, $761,646, $740,437 and $875,279, respectively, and the incentive advisory fees amounted to $2,807, $741,233, $797,054 and $1,753,112, respectively. These fees will increase due to the increase in our stockholders' equity resulting from the offering of common stock by us in each of June and November 2001 and the investment of the net proceeds thereof. The Manager pays all expenses, including salaries, wages, payroll taxes, costs of employee benefit plans and charges for incidental help, attributable to its own operations in connection with providing services under the advisory agreement. The Manager also pays its own accounting fees and related expenses, legal fees, insurance, telephone and utilities. To the extent AFC provided facilities or services to the Manager, the expenses of these services are allocated by AFC to the Manager.

    The officers of the Manager are: Stewart Zimmerman, President and Chief Executive Officer; Gary N. Thompson, Chief Financial Officer and Treasurer; William S. Gorin, Executive Vice President and Secretary; Ronald A. Freydberg, Senior Vice President; and Teresa Covello, Senior Vice President and Controller. Each of Messrs. Zimmerman, Gorin and Freydberg have entered into written employment agreements with the Manager under which they are paid annual salaries and bonuses and participate in certain employee benefits provided by AFC to all of its employees. Mr. Thompson is paid directly by AFC. Ms. Covello is expected to enter into an employment agreement with our company on or prior to the consummation of the Merger. We do not reimburse the Manager or AFC for any of the salaries, bonuses or benefits of any of these individuals or of any other employees of AFC that provide services to us on behalf of the Manager under the advisory agreement. However, each of the Manager's officers and a number of other employees of AFC, including Michael B. Yanney, that provide services to us on behalf of the Manager, have been awarded stock options and dividend equivalency rights under our 1997 Employee Stock Option Plan.

    AFC owns 80% of the membership interests of the Manager and Messrs. Zimmerman, Gorin and Freydberg own the remainder. The shares of the Manager were issued without registration under federal or state securities laws and there is no public market for these shares. The Manager has not paid any dividends to its stockholders. However, under the terms of the Merger Agreement, the Manager is required to pay dividends to its stockholders equal to any remaining earnings and profits on its books immediately prior to the effective time of the Merger. Upon consummation of the Merger, each share of the Manager will be converted into 128.75 shares of our common stock.

Background

Recommendation of the Special Committee and our Board of Directors

    Our Board of Directors and the Special Committee have each determined that the Merger Proposal is fair to, and in the best interests of, our company and our stockholders, and has approved

27

the Merger Proposal. Accordingly, our Board of Directors recommends that the stockholders of our company vote "FOR" approval and adoption of the Merger Proposal.

    In considering the recommendation of our Board of Directors with respect to the Merger Proposal, our stockholders should also consider that some of our directors and officers of our company own interests in the Manager and/or AFC or may be subject to other conflicts of interest, and may therefore have interests in the Merger that are different than, or in addition to, the interests of our stockholders who have no interest in the Manager. For more information concerning the interests of these persons in the Merger, please read "Risk Factors—Conflicts of Interest" and "—Conflicts of Interest." In order to ensure that these interests would not result in any actual or perceived conflicts with the duties of our Board of Directors, our Board of Directors appointed a Special Committee which consisted of three of our independent directors (Messrs. Michael L. Dahir, Gregor Medinger and W. David Scott) who have no personal interests in the Merger, to consider and evaluate the internalization of our management and make a recommendation to the Board of Directors. Our Board of Directors authorized the Special Committee to retain outside counsel and financial advisors to assist in its assignment. The proceedings of the Special Committee are described below.

    In reaching the determination that the Merger Proposal is in the best interest of our company and our stockholders, our Board of Directors consulted with our management, the financial advisor of the Special Committee, as well as our legal counsel and accountants and considered the short-term and long-term interests of our company. The factors considered by our Board of Directors include those described below.

Factors Considered by Our Board of Directors

•

The analyses and conclusions of the Special Committee described below (which were adopted by our Board of Directors as its own);



•

The business reasons for the Merger Proposal set forth below, including the benefits to be realized by us from the Merger Proposal;



•

The extensive negotiations of the representatives of the Special Committee with representatives of the Manager; and



•

The opinion of Tucker delivered to the Special Committee stating that, as of its date, the consideration to be paid to the stockholders of the Manager is fair, from a financial point of view, to our company and to our stockholders.

    While our Board of Directors considered all of the above factors, it did not make determinations with respect to each of the factors and did not find it practical to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors considered in making its determination. Rather, our Board of Directors made its judgment with respect to the Merger Proposal based on the total mix of information available to it, and the judgments of individual directors may have been influenced to a greater or lesser degree by their individual views with respect to different factors.

Proceedings of the Special Committee and the Board of Directors

    At a special meeting of our Board of Directors on June 22, 2001, Mr. Zimmerman gave a report concerning the results of our common stock offering, which generated net proceeds of approximately $67.1 million. He also reported that the underwriters leading this offering advised him that additional raising of public equity would be greatly facilitated if we became a self-advised REIT. Our Board of Directors discussed this recommendation and the merits thereof. It was then proposed that a special committee consisting of our independent directors be appointed to consider any proposed transaction. The Board of Directors approved the formation of the Special Committee and authorized it to (1) consider and evaluate various proposals regarding the appropriate structure for becoming

28

self-advised; (2) negotiate on our behalf the terms of any such proposal or resulting transaction; (3) consider whether such terms and conditions are fair, from a financial point of view, to our company and our stockholders and report such findings and make a recommendation to our Board of Directors; and (4) hire a financial advisor and such other experts as the Special Committee deems necessary.

    After this meeting, the Manager retained the law firm of Kutak Rock LLP ("Kutak") as its legal counsel and the Board of Directors retained the law firm of Clifford Chance Rogers & Wells LLP ("CCRW") as legal counsel to our company. Mr. Alan L. Gosule, one of our independent directors, is a partner at CCRW. Mr George H. Krauss, one of our directors, is a former partner of, and is currently of counsel to, Kutak.

    During the course of its deliberations and negotiations concerning a possible merger between us and the Manager, the Special Committee met seven times over a two and one-half month period commencing July 2, 2001.

    The first meeting of the Special Committee was convened on July 2, 2001. Following a general discussion of the nature and scope of its authority and duties, the Special Committee elected Michael L. Dahir to serve as its Chairman. The Special Committee also considered the selection of financial and legal advisors. The Special Committee then discussed possible structures for completing the acquisition of the Manager.

    On July 9, 2001, the Special Committee held its second meeting, at which a representative from the law firm of Salans Hertzfeld Heilbronn Christy & Viener ("Salans") reviewed with the Special Committee members their duties as members of our Board of Directors and as members of the Special Committee. The Special Committee elected to engage Salans as legal counsel to the Special Committee, subject to formal engagement at a later meeting. The Special Committee discussed possible structures for the acquisition of the Manager and any alternatives thereto. Following such discussions, the Special Committee selected three firms to evaluate as potential financial advisors.

    At the meeting of the Special Committee held on July 16, 2001, the members of the Special Committee and representatives from its legal counsel interviewed three firms, including Tucker, as potential financial advisors.

    The Special Committee next met on July 27, 2001, and determined to engage Tucker as the independent financial advisor to the Special Committee. This determination was based on Tucker's familiarity with our company, its experience in transactions of this nature and of this industry and on the competitiveness of its proposed terms of engagement. A formal engagement letter was signed on August 6, 2001. The Special Committee also officially ratified its selection of Salans as its legal counsel.

    Following this meeting, representatives of the Special Committee invited the Manager to submit a proposal to the Special Committee outlining the terms upon which the Manager would be willing to be acquired by our company.

    Thereafter, Tucker conducted a financial investigation of the business, operations and prospects of our company and the Manager and performed certain valuation analyses. Among other things, representatives of Tucker met with officers and key employees of our company and the Manager, reviewed various documents, financial statements and projections and other reports and material provided by our company and the Manager.

    To assist the Manager in developing its proposal to the Special Committee, on July 28, 2001 the Manager determined to engage FBR to appraise the fair value of the business of the Manager. The Manager selected FBR because of its familiarity with our company and the business of the Manager and its experience in this industry. The Manager and FBR signed an engagement letter relating to the appraisal on August 7, 2001 which provides for a fee of $60,000 plus the reimbursement of expenses in

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an amount up to $8,000. The payment of this fee and the reimbursement of expenses are not contingent on consummation of the Merger.

    The Board of Directors met again on August 14, 2001 and Mr. Dahir, the Chairman of the Special Committee, gave the Board of Directors an interim report of the progress made by the Special Committee.

    On August 20, 2001, FBR delivered a written appraisal report to the Manager's board of directors that set forth FBR's estimate of the fair value of the business of the Manager. FBR conducted several analyses including a market capitalization analysis, a discounted cash flow analysis and a comparable transaction analysis which provided a range of values for the Manager of $6,235,000 to $14,997,000. FBR determined the most applicable and reasonable methodology was the comparable transaction analysis because this transaction was similar to the transactions compared in this analysis in terms of the asset size involved and the nature of the advisory agreement. This analysis provided a range of values for the Manager of $9,616,000 to $11,616,000.

    On August 20, 2001, in response to the Special Committee's request, the Manager submitted to the members of the Special Committee a memorandum summarizing a proposal to merge the Manager into our company in exchange for our issuance of shares of our common stock having a value of $10.6 million. The proposal stated that the merger consideration was based on an independent appraisal of the Manager conducted by FBR and the market value per share of our common stock on the date of this proposal. The proposal contemplated that the shares of our common stock to be issued in the transaction would be registered with the SEC. Additionally, it provided that representations and warranties of the Manager and its stockholders should survive for only one year following consummation of the Merger and that these representations and warranties would not be supported by any escrow or holdback provisions. The proposal was supplemented on August 28, 2001 to include provisions that requested us to assume certain bonus obligations for the three employees of the Manager, that the share amount to be issued be based on the average of the high and low sale prices of our common stock on the NYSE for the ten trading day period prior to the signing of the Merger Agreement and that a termination right for either party be available if our common stock, at any time prior to closing, traded either 25% higher or lower than the average sales price used to determine the amount of shares to be issued in the Merger.

    On August 28, 2001, the Special Committee met to consider such proposal. At that meeting, the Special Committee discussed the necessity of retaining, and understanding the terms of the retention of, Messrs. Zimmerman, Gorin and Freydberg, the three principal Manager employees responsible for directing our operating and investment strategies and overseeing our business operations. The Special Committee also discussed the terms of the Manager's proposal and the issues that might be anticipated to arise in the negotiation of the Merger Agreement. Among these were the value of the right to use the "America First" name, the cost and necessity of registration of the shares to be issued to the stockholders of the Manager, the possible effect on the market value of our shares of common stock resulting from a large number of our shares being available for sale as a result of the Merger, the time for determining the value of the shares for purposes of determining the number of shares to be issued in the Merger, the advisability of employing a "collar" to adjust the amount of the merger consideration or to give either party a right to terminate the transaction if the trading value of our shares moved too sharply one way or another, the relationship between the trading value and the fair value of our company, whether the transaction would be accretive to our earnings per share on a prospective basis, and the means to assure enforcement of our rights in case of any breach of the representations, warranties or covenants to be made by the Manager and its stockholders in the Merger Agreement.

    Additionally, the Special Committee considered the termination of the advisory agreement, as an alternative to the Merger. Among the factors discussed in this regard were the necessity to pay the

30

termination fee in cash, rather than in shares, the interruption to our business that might follow from loss of the services of Manager without assurance of employment of its principal employees, the use of the facilities used by the Manager in operating our business, the lack of predictability of the appraisal process to determine the amount of the termination fee, the assumption of liability of the Manager implicit in the Merger structure and the comparative taxation of each transaction. In regard to these discussions, the Special Committee determined that its current cash resources would not be best utilized in the payment of a fee to terminate the advisory agreement, that the risk of disruptions to our business operations in connection with such a termination were high and that the use of stock as consideration for the Merger would have the positive effect of further aligning the interest of our key management with those of our other stockholders. As a result of these discussions, the Special Committee determined to expand the role of Tucker to include active negotiation of the terms of the Merger Proposal. The Special Committee ultimately concluded that it would be preferable to acquire the Manager on a negotiated basis rather than terminate the advisory agreement.

    The Special Committee determined that our shares of common stock to be issued in the transaction should not be registered with the SEC but should be subject to appropriate lock-up agreements restricting their resale, that the Merger should be conditioned on our ability to retain Messrs. Zimmerman, Gorin and Freydberg as our employees, that the Manager and its stockholders should indemnify us for breaches of representations, warranties and covenants, that the representations and warranties should survive the consummation of the Merger for two years, except that those related to taxes, employee matters and environmental matters should survive until the applicable statute of limitations and that we should not assume any accrued bonus obligations for the Manager's employees. The Special Committee communicated these determinations to representatives of the Manager through its counsel.

    After receiving the initial determination of the Special Committee, the Manager then entered into discussions with its employees concerning the terms under which they would be willing to become employed directly by our company. These discussions concerned the amount of base compensation, the basis on which bonus compensation should be calculated, and the terms of certain severance payments in the event of the change of control of our company. Over the course of the next few weeks, representatives of the Special Committee engaged in direct discussions of these terms with Mr. Zimmerman, who was acting on behalf of the three employees of the Manager. The employees engaged legal counsel to advise them on these issues and to negotiate employment arrangements on their behalf.

    On August 30, 2000, Kutak circulated an initial draft of the Merger Agreement. There ensued over the next 24 days a series of conference calls and negotiations followed by numerous revisions and recirculations of drafts of the Merger Agreement.

    Between August 30, 2001 and September 10, 2001, there were several discussions between representatives of the Special Committee and the Manager in which the terms of the Merger Agreement were negotiated. Through negotiation, the merger consideration was fixed at 1,287,500 shares plus one additional share to account for certain fractional shares, that such shares would not be registered, that no adjustment in the amount of shares to be issued or termination right would be provided for relating to changes in the market price of our stock, that the representations and warranties of the Manager and its stockholders would survive one year, except for those relating to taxes, employee matters and environmental matters which would survive until the applicable statute of limitations, that we would assume the employment contracts, as modified, of the three employees of the Manager, that we would assume approximately $150,000 of accrued bonus obligations of the Manager and that the stockholders of the Manager would indemnify us for breaches of their representations, warranties and covenants in amounts and on terms more fully described under "The Merger Agreement—Indemnification." During these negotiations, the Special Committee consulted with Tucker, Salans and CCRW.

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    On September 10, 2001, the Special Committee met and reviewed, discussed, and analyzed written materials and financial analysis prepared by Tucker. Tucker reported a range of values for the Manager, based on a number of analyses described under "—Opinion of the Financial Advisor to the Special Committee." The report also showed a range of net accretion to our stockholders resulting from the Merger, varying with our interest margins in 2001 and 2002. This net accretion took into account the dilutive effect of the issuance of an additional 1,287,501 shares, offset by the savings that would be expected to follow from elimination of the advisory fees to the Manager after taking into account the assumption of employment costs and increased overhead. The Special Committee, relying on the analysis prepared by Tucker, determined that the consummation of the transactions contemplated by the Merger Proposal would be in our best interest, and requested that certain additional modifications be made to the proposed transaction. The Special Committee directed that our negotiating team, Salans, CCRW and Tucker, discuss the terms of the Merger Proposal with the Manager. Among the changes that followed this meeting were the addition of both a lock-up commitment from the Manager stockholders to refrain for a one year period following the consummation of the Merger from selling, transferring or pledging 84% of the shares they receive in the Merger and a termination right for us if we are not satisfied with our due diligence review of the Manager or if the financial conditions and prospects of the Manager change adversely between the signing of the Merger Agreement and the closing of the Merger.

    At this meeting, the Special Committee also reviewed the status of the negotiations with Messrs. Zimmerman, Gorin and Freydberg concerning their employment agreements. Members of the Special Committee were advised that a form of addendum to their employment agreements, to be effective at the later of January 1, 2002 or the Effective Time, was agreed to, and it is a condition of the Merger Agreement that these three employees become our employees on these terms. As part of these addenda, the representatives of the Special Committee negotiated for non-competition and non-solicitation provisions to be inserted into such employment contracts. For a more detailed description of these terms, please see "The Merger Agreement—Employee Matters."

    On September 21, 2001, the Special Committee met and discussed the Merger Proposal and the terms of the Merger Agreement. After an extensive discussion and considering such factors as the fairness of the consideration to be paid to the stockholders of the Manager from a financial point of view (including whether the transaction was accretive) and the terms of the Merger Agreement, the Special Committee determined that the Merger Proposal is in the best interests of our company and our stockholders and recommended that the Board of Directors approve the Merger Proposal. On the same date, the Board of Directors met and received a report from the Special Committee which reviewed the process that the Special Committee had followed in reviewing the Merger Proposal. Mr. Dahir reported that the Special Committee had approved, and was recommending to the Board of Directors, that we enter into the Merger Agreement and proceed with the Merger. Based on this recommendation, the Board of Directors determined that the Merger Proposal would be in the best interest of our company and our stockholders and is on terms that are fair and commercially reasonable to our company and stockholders. Accordingly, after due consideration and advisement by the Special Committee, the Board of Directors (with the independent directors approving under a separate vote) approved the Merger Proposal and recommended that stockholders approve the Merger Proposal at the Special Meeting. The Merger Agreement was executed and delivered by each party thereto on September 24, 2001. A press release announcing the execution of the Merger Agreement was issued by our company on September 24, 2001.

    The negotiations regarding the terms of the Merger were conducted on our behalf by Mr. Dahir, acting under the supervision of the Special Committee, and on behalf of the Manager principally by Mr. Yanney, the Chairman of AFC (and one of our directors), acting at the direction of the Manager's board of directors. Each party's negotiating team also was assisted by its respective financial, legal, tax and accounting advisors. In certain instances, issues were discussed directly between the respective legal

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counsel. Upon conclusion of the negotiations, the Special Committee and the Board of Directors approved the Merger Proposal.

    The Board of Directors has agreed to compensate Messrs. Medinger and Scott, as members of the Special Committee for their services rendered in connection with the Merger Proposal, at the rate of $10,000 and Mr. Dahir, as the Chairman of the Special Committee, at the rate of $20,000. The payment of these fees is not contingent on the consummation of the Merger.

Reasons for the Merger; Recommendations of the Special Committee and the Board of Directors

    Special Committee.  In reaching its conclusion to unanimously recommend that the Board of Directors approve the Merger Proposal, the Special Committee considered, without assigning relative weights to, a number of factors, including the following:

•

our belief that self-advised REITs, as compared to externally-advised REITs, have commanded a premium in the marketplace based on traditional financial measures such as the multiple of stock price to funds from operations per share and thereby may provide such REITs with a competitive advantage in financing their investment portfolios. Though it is not possible to quantify the existence of such premium or the benefit obtained thereby, we believe that the consummation of the Merger will improve our ability to raise capital;



•

the possibility that we, as a self-advised REIT, may be more attractive to certain investors and market analysts and may enjoy enhanced market perceptions;



•

the potentially accretive effect on our current and anticipated earnings per share compared to a continuance of the current advisory agreement and its associated base and incentive advisory fees;



•

the efficiencies arising from a self-advised structure, including eliminating the base and incentive advisory fees, including any built-in profit and the avoidance of future increases thereof if our asset base and profitability continue to grow and if we pursue future equity raises;



•

the alignment of the interests of our management with our stockholders through ownership of our shares;



•

the terms and conditions of the Merger Agreement, including the type and amount of consideration being paid to AFC and the Manager Stockholders which would preserve our cash liquidity;



•

the proven expertise and substantial experience of the employees of the Manager, who will become our employees as a result the Merger, in managing our investments and performing administrative services for us, and who we believe are critical to our successful performance in the future;



•

focusing the full business time and attention of our executive officers on our business operations;



•

the uncertainty of whether our executive officers would continue their role with our company if we terminated the advisory agreement;



•

the reduction in potential future conflicts of interest that could develop between us and AFC;



•

the desirability of substantially mitigating our dependence on AFC;



•

the benefits associated with the acquisition of all assets of the Manager including, among other things, workforce in place, business books and records, operating systems, contract rights and information bases and systems;

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•

the ability to operate consistently with recent market trends that favor self-advisement of REITs having business operations of our size and scope;



•

the alternatives to the Merger Proposal, including the direct and indirect relative costs and benefits of (x) continuing to be advised by the Manager or (y) terminating the advisory agreement and hiring a new management team and employees or a new outside advisor;



•

the uncertainty of, and length of time necessary for, the calculation of the termination fee under the advisory agreement due to the requirement that an appraisal be done, the likelihood of an extended negotiation process in determining such price and the requirement of a cash payment;



•

the valuation analyses performed by Tucker, including analyses of previous and similar transactions involving REITs, discounted cash flow analyses, analyses of selected asset management companies and pro forma accretion; and



•

the written opinion of Tucker expressed to the Special Committee on September 24, 2001 that, on such date and subject to certain assumptions, qualifications and limitations stated therein, the consideration to be paid by us in the Merger Proposal is fair, from a financial point of view, to our company and our stockholders.

    The Special Committee also considered certain factors which could, as a result of the Merger, negatively affect us and our stockholders. These factors included the following:

•

the conflicts of interest of the negotiating team and certain members of our Board of Directors in the Merger, including their respective positions at our company, the Manager and AFC, as well as the compensation and/or other benefits received by such persons, either directly or indirectly, from AFC;



•

the potential additional expenses and liabilities expected to be incurred by us;



•

the potential adverse tax consequences to us should the Merger fail to qualify as a tax-free reorganization or if any of the Manager's earnings and profits are carried over to us as a result of the Merger;



•

the potential liabilities associated with the direct employment of personnel, including workers' disability and compensation claims, labor disputes and other employee-related grievances; and



•

the potential loss of certain intangible benefits from being associated with AFC, including AFC's management expertise and capital markets presence.

    The Special Committee has determined that, in light of all the factors that it considered, it believes the Merger Proposal to be fair to, and in the best interests of, our company and our stockholders. Accordingly, the Special Committee has unanimously recommended that the Board of Directors approve the Merger Proposal.

    Board of Directors.  The Board of Directors (with the independent directors approving under a separate vote) has determined that the Merger Proposal is fair to, and in the best interests of, our company and our stockholders based on the analyses and conclusions of the Special Committee (which the Board of Directors adopted as its own), on the negotiations between our negotiating team, as directed by the Special Committee, and the representatives of the Manager, and on Tucker's opinion delivered to the Special Committee. The Board of Directors did not quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. The Board of Directors (with the independent directors approving under a separate vote) has approved the issuance of shares of our common stock pursuant to, and the other transactions contemplated by, the Merger Proposal and recommends that our stockholders vote "FOR" approval of the Merger Proposal.

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Opinion of the Financial Advisor to the Special Committee

    On September 24, 2001, Tucker delivered its written opinion to the Special Committee of our Board of Directors to the effect that as of such date and subject to certain assumptions, qualifications and limitations stated therein, the consideration to be paid by us pursuant to the Merger Proposal is fair, from a financial point of view, to our company and our stockholders.

    On August 6, 2001, the Special Committee engaged Tucker Anthony Incorporated, acting through its Tucker Anthony Sutro Capital Markets division, to render an opinion to the Special Committee that as of a certain date and subject to certain assumptions, qualifications and limitations stated therein, the Merger Consideration to be paid by our company to the stockholders of the Manager pursuant to the Merger Agreement is fair, from a financial point of view, to our company and our stockholders.

    On September 5, 2001, the Special Committee and Tucker formally agreed to modify Tucker's engagement, widening its scope to a financial advisory role in which Tucker would assist the Special Committee in its role in negotiating various elements of the transaction.

    At the meeting of the Special Committee on September 10, 2001 in Omaha, Nebraska, Tucker presented certain financial analyses accompanied by written materials in connection with the delivery of its fairness opinion. The principal analyses and other considerations presented by Tucker to the Special Committee at the time, as updated on September 24, 2001, are summarized below:

    Analysis of Precedent REIT Advisor Internalization Transactions.  Tucker analyzed selected transactions in which REITs acquired their external advisor. These transactions included CRIIMI MAE, Inc.'s acquisition of CRI, Inc., IMPAC Mortgage Holdings, Inc.'s acquisition of ICAI, Summit Real Estate Management Inc.'s acquisition of Roycom Advisors, Inc., Canadian Apartment Properties REIT's acquisition of Canadian Apartment Communities, Inc., Imperial Credit Industries Inc.'s acquisition of Imperial Credit Commercial Mortgage Investment Corp., CWM Mortgage Holdings Inc.'s acquisition of Countrywide Asset Management Corp., Security Capital Atlantic, Inc.'s acquisition of Security Capital Group, Inc., Asset Investors Corp.'s acquisition of Financial Asset Management, Commercial Net Lease's acquisition of CNL Realty Advisors, Health Care REIT's acquisition of First Toledo Advisory Company, Realty Income Corp.'s acquisition of R.I.C. Advisors, Inc., Health Care REIT's acquisition of First Toledo Advisor Company, Shurgard Storage Centers' acquisition of Shurgard, Inc., and Bradley Real Estate Trust's acquisition of R.M. Bradley & Co. (collectively, the "Precedent REIT Transactions"). Tucker compared the purchase price paid in each transaction with (i) the latest twelve months or reported period, on an annualized basis, of advisory fees paid to the target advisor and (ii) the latest twelve months or reported period, on an annualized basis, of net income of the acquiring REIT and calculated the following ranges of multiples or percentages: a range of purchase price to advisory fees paid to the target advisor of 2.0x to 7.4x with a mean of 4.6x; a range of purchase price to net income of the acquiring REIT of 0.3x to 1.9x with a mean of 1.1x. Tucker applied the multiple and percentage ranges to the projected advisory fees to be paid to the Manager for the twelve months ended September 30, 2001 and our net income for the latest twelve months ended September 30, 2001 based on projections provided by our management. The average of the implied ranges yielded a range of values for the Manager from $13.5 million to $13.7 million, with a mean of $13.6 million. Tucker believes that this analysis supports the fairness from a financial point of view, to our company and our stockholders, of the consideration to be paid in the Merger, given that, as of the date of this opinion, the approximate value of such consideration is below the range of values of the Manager derived from the mean of the acquisition multiples of the Precedent REIT Transactions.

    Discounted Cash Flow Analysis.  Tucker performed a discounted cash flow analysis of the forecasted financial performance of the Manager. This analysis was based on forecasted advisor fees for the years 2001 through 2006 using the base case financial projections provided by our management in which interest rates are assumed to remain constant. Tucker developed three scenarios differing in

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terms of profitability for the Manager going forward. Under this analysis, Tucker determined a range of values for the Manager by adding (i) the present value of the estimated net income (assuming a 40% tax rate going forward) of the Manager for each of the years in the five-year period ending December 31, 2006 and (ii) the present value of the terminal value of the Manager at the end of 2006. The terminal value was determined by applying a range of exit multiples from 4.0x to 5.0x to the year 2006 estimated advisory fees paid to the Manager. The net income streams and terminal value were discounted to present values using discount rates that ranged from 25% to 27%. The calculation resulted in a range of discounted cash flow values for the Manager from $9.0 million to $11.7 million with a mean of $10.4 million. Given that the value of the consideration to be paid in the Merger, as of the date of the opinion, is below the mean value of the Manager derived from the discounted cash flow analysis, Tucker believes that this analysis supports the fairness, from a financial point of view, to our company and our stockholders of the consideration to be paid in the Merger.

    Selected REIT Analysis.  Tucker selected certain publicly-traded mortgage REITs in order to use public equity valuation metrics to compare the Manager's valuation pursuant to the Merger Agreement. These companies included Apex Mortgage Capital, Inc., Redwood Trust, Inc., Thornburg Mortgage, Inc., Anthracite Capital, Inc., Anworth Mortgage Asset Corporation and Annaly Mortgage Management (collectively, the "Selected REITs"). Tucker compared the equity market capitalization of each of the Selected REITs with its respective net income and EBTDA (defined as earnings before taxes, depreciation, and amortization). The Selected REITs traded in the following ranges: a range of equity market capitalizations to latest twelve months net income of 7.7x to 16.3x with a mean of 10.7x, and a range of equity market capitalizations to latest twelve months EBTDA of 7.3x to 12.5x with a mean of 9.1x. Applying the average of the trading multiples to the Manager's net income (defined here as the Manager's projected earnings for the twelve months ended September 30, 2001 taxed at 40%), yielded an implied range of values for the Manager from $9.9 million to $13.9 million with a mean of $11.9 million. All 2001 earnings estimates for the Selected REITs were based on First Call Consensus Estimates as of September 1, 2001. "First Call" is a data service that monitors and publishes a compilation of earnings estimates produced by selected research analysts regarding companies of interest to institutional investors. Given that the consideration to be paid in the Merger, as of the date of the opinion, is within the range of values for the Manager derived from the mean trading multiples of the Selected REITs, Tucker believes that this analysis supports the fairness, from a financial point of view, to our company and our stockholders of the consideration to be paid in the Merger.

    Accretion—Dilution Analysis.  Tucker also analyzed the pro forma effects of the Merger, excluding the related non-recurring, non-cash charge, on our earnings per share and the accretion to our earnings per share resulting from the Merger. This analysis is based on the base case financial projections provided by our management for the years 2001 and 2002. In this analysis Tucker considered a broad range of profitability scenarios as measured by Net Interest Margin ("NIM") with our projection for each year serving as the mean. Tucker determined that the Merger Proposal would be accretive in 2001 and would only become dilutive if the year end 2001 NIM results are approximately 40% below our current projections. Tucker determined that the Merger Proposal would be accretive in 2002 and would only become dilutive if the year end 2002 NIM results are approximately 41% below our current projections. Based on the consideration to be paid in the Merger, as of the date of the opinion, Tucker believes that this analysis supports the fairness, from a financial point of view, to our company and our stockholders of the consideration to be paid in the Merger.

    Contribution Analysis.  Tucker reviewed certain operating and financial information, including net income and revenues (defined as net interest income plus noninterest income), for our company and the Manager. The analysis indicated that the Manager's stockholders would receive 6.3% of our outstanding common stock pursuant to the Merger Agreement. Tucker also compared the relative income statement and operating contributions of our company and the Manager to the combined company based on pro forma results for the years ended 2001 ("the 2001 Comparison") and 2002 ("the

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2002 Comparison"). For the 2001 Comparison and the 2002 Comparison, the Manager would contribute 7.9% and 9.0%, respectively, to the combined net income. Tucker observed that the Manager's pro forma contribution to net income exceeded the proportion of our common stock to be received by the stockholders of the Manager in the Merger. Tucker thus believes that this analysis, as of the date of the opinion, supports the fairness, from a financial point of view, to our company and our stockholders of the consideration to be paid in the Merger.

    On September 21, 2001, Tucker delivered its oral opinion to the Special Committee in a teleconference to the effect that as of such date and subject to certain assumptions, qualifications and limitations to be stated in its opinion, the consideration to be paid by us pursuant to the Merger Agreement is fair, from a financial point of view, to our company and our stockholders. Tucker then delivered a full written presentation and its written opinion on September 24, 2001.

    In connection with the preparation of its opinion, Tucker, among other things:

•

reviewed the Merger Agreement;



•

reviewed our Annual Report on Form 10-K and related publicly available financial information for the two most recent fiscal years ended December 31, 1999 and 2000, and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2001 and June 30, 2001;



•

reviewed our five-year financial forecasts as furnished to Tucker by our management;



•

reviewed the unaudited balance sheets, income statements and statements of cash flows of the Manager for the six months ended June 30, 2001 and the years ended December 31, 2000, 1999 and 1998, all as furnished to Tucker by the Manager;



•

reviewed the advisory agreement dated April 9, 1998;



•

conducted discussions with members of senior management of our company and the Manager, respectively, concerning the past and current business, operations, assets, present financial condition and future prospects of our company and the Manager, respectively;



•

reviewed the historical reported market prices and trading activity for our common stock;



•

compared certain financial information, operating statistics and market trading information relating to us with published financial information, operating statistics and market trading information relating to selected publicly traded companies that Tucker deemed to be reasonably similar to us; and compared certain financial information and operating statistics relating to the Manager with published financial information and operating statistics relating to selected publicly traded companies that Tucker deemed to be reasonably similar to the Manager;



•

compared the financial terms of the Merger with the financial terms, to the extent publicly available, of selected other recent acquisitions that Tucker deemed to be relevant; and



•

reviewed other financial studies and analyses and performed other investigations and took into account other matters as Tucker deemed necessary.

    The preparation of a fairness opinion is a complex process and not necessarily susceptible to summary description. Tucker believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all factors and analyses, could create a misleading view of the processes underlying its opinion. In its analyses, Tucker made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond management's control. Any estimates contained in Tucker's analyses are not necessarily indicative of actual values, which may be significantly more or less favorable than as set forth herein. Estimated values do not purport to be appraisals and do not

37

necessarily reflect the prices at which companies or their securities may be sold in the future and such estimates are inherently subject to uncertainty.

    In rendering its fairness opinion, Tucker relied, without assuming responsibility for independent verification, on the accuracy and completeness of all financial and operating data, financial analyses, reports and other information that were publicly available, compiled or otherwise furnished or communicated to Tucker by or on behalf of the Manager and our company. With respect to the financial and operating forecasts furnished to Tucker, Tucker assumed that they reflected the best current judgment of the management of our company and the Manager as to future financial performance, and that there was a reasonable probability that the projections would prove to be substantially correct. The forecasts used by Tucker are subject to numerous contingencies beyond the control of the management and are thus not necessarily indicative of future results.

    The fairness opinion of Tucker is limited to the fairness as of its date, from a financial point of view, of the consideration to be paid in the Merger and does not address the underlying business decision to effect the Merger (or alternatives thereto) nor does it constitute a recommendation to any stockholder of our company as to how such stockholder should vote with respect to the Merger Proposal. Tucker did not make an independent evaluation or appraisal of any assets and was not furnished with any evaluation or appraisal.

    Furthermore, Tucker expresses no opinion as to the price or trading range at which shares of our common stock will trade following the completion of the Merger.

    As described above, the Tucker fairness opinion to the Special Committee was one of the many factors taken into consideration by the Special Committee in making its determination to recommend to the Board of Directors that it approve the Merger Proposal.

    Pursuant to an agreement dated as of August 6, 2001 and modified on September 5, 2001, we have paid Tucker an advisory fee of $25,000 as a retainer for the first ninety days of the engagement from August 2001 through October 2001, $65,000 in connection with the delivery of its opinion dated September 24, 2001 and an additional fee of $65,000, in connection with Tucker's role as a financial advisor to the Special Committee in its negotiation of the terms of the Merger Agreement. The fees paid or payable to Tucker are not contingent upon the contents of the opinion delivered. We have agreed to indemnify Tucker against certain liabilities arising out of or in conjunction with its rendering of services under its engagement. In addition, we have agreed to reimburse Tucker for its reasonable fees and expenses of legal counsel.

    In the past, Tucker co-managed our common stock offerings, completed on June 27, 2001 and November 7, 2001, respectively. In addition, in the ordinary course of its business, Tucker actively trades in our securities for its own account and for the accounts of customers, and accordingly, may at any time hold a long or short position in such securities.

    Tucker is a nationally recognized investment banking firm and is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, secondary distributions of listed and unlisted and private placements.

Conflicts of Interest

    Certain of our directors and executive officers who were involved in discussions and negotiations relating to the Merger Proposal have interests in connection with the Merger Proposal that are in addition to, or conflict with, our company and our stockholders. In particular, our executive officers, Messrs. Zimmerman, Gorin and Freydberg, are employees of, and in the aggregate own 20% of, the Manager. Mr. Michael B. Yanney, our Chairman of the Board of Directors, and Mr. George H. Krauss, one of our directors, beneficially own approximately 57% and 17%, respectively, of AFC, which owns 80% of the Manager. In addition, Messrs. Zimmerman and Gorin own, in the aggregate, approximately

38

3% of AFC. Therefore, the Merger will result in these individuals receiving, in the aggregate, beneficial ownership of an additional 1,287,501 shares of our common stock as a result of the consummation of the Merger.

    As of November 9, 2001, our executive officers and directors beneficially owned approximately 2.9% of our issued and outstanding shares of our common stock and Messrs. Yanney, Zimmerman, Gorin, Freydberg and Krauss beneficially owned approximately 2.8%. Following the issuance of the shares of our common stock in the Merger, such individuals will beneficially own approximately 7.1%. As a result of such increased ownership, they could exert greater influence on our company and would represent a higher percentage of the vote for any action requiring stockholder approval. These individuals have all indicated that they will vote in favor of the Merger Proposal.

    In addition, the Merger Proposal will result in an increase in the salaries of Messrs. Zimmerman, Gorin and Freydberg and the establishment of a minimum bonus pool for them at the time we assume their employment contracts. See "The Merger Agreement—Employee Matters." Accordingly, these individuals have an economic interest in the completion of the Merger that may be in conflict with our interests or those of our stockholders. See "Risk Factors—Conflicts of Interest" and "The Merger Proposal—Conflicts of Interest."

    In order to mitigate the potential conflicts of interest involved in the negotiation of the terms of the Merger Proposal, the Special Committee consisting of three of our independent directors who have no conflicting interests, own no interest in the Manager and have no personal interest in the Merger, were responsible for negotiating the terms of the Merger Agreement on our behalf. The Special Committee approved the Merger Proposal and unanimously recommended it for approval to our full Board of Directors.

    Each of Tucker, who acted as financial advisor to the Special Committee, and Friedman, Billings, Ramsey & Co., Inc. ("FBR"), who conducted an appraisal of the Manager, co-managed our common stock offerings, which were completed on June 27, 2001 and November 7, 2001, respectively, and may in the future, from time to time, provide us with investment banking, financial advisory and other services for which they may earn a fee.

Regulatory Matters

    We, the Manager and AFC are not aware of any material approval or other action by any state, federal or foreign governmental agency that would be required prior to the consummation of the Merger in order to effect the Merger or of any license or regulatory permit that is material to the businesses of our company or the Manager and which is likely to be adversely affected by the consummation of the Merger.

Accounting Treatment

    For accounting and financial reporting purposes, the Merger will not be considered the acquisition of a "business" for purposes of applying our stock APB Opinion No. 16, "Business Combinations" and, therefore, the market value of our common stock issued, valued as of the consummation of the Merger, in excess of the fair value of the net tangible assets acquired, will be charged to operating income rather than capitalized as goodwill.

39

THE MERGER AGREEMENT

    The description of the Merger Agreement set forth below does not purport to be complete and is qualified in its entirety by, and made subject to, the more complete and detailed information set forth in the Merger Agreement among the Company, the Manager, AFC and the Manager Stockholders, a copy of which is attached as Appendix A to this Proxy Statement and incorporated herein by reference.

Terms of the Merger

    The Merger.  The Merger Agreement provides for the Merger of the Manager with and into our company. We will continue as the surviving corporation following completion of the proposed Merger. The separate corporate existence of the Manager will then cease, and our internal corporate affairs will continue to be governed by the laws of the State of Maryland.

    Effective Time.  The Merger Proposal will be effective when the articles of merger have been filed with and accepted for record by the State Department of Assessments and Taxation of the State of Maryland or at such other time as is agreed to by us and the Manager. The articles of merger will be filed as soon as practicable after our stockholders approve the issuance of shares of our common stock pursuant to, and the other transactions contemplated by, the Merger Agreement by the required vote and the other conditions to the completion of the proposed Merger have been satisfied or waived. See "—Conditions to Consummation of the Merger."

    Articles of Incorporation and Bylaws.  The Merger Agreement provides that our Articles of Incorporation and Bylaws in effect immediately before the Effective Time will be the Articles of Incorporation and the Bylaws of the surviving corporation of the Merger.

    Directors and Officers.  Our directors and officers immediately prior to the Effective Time will be the directors and officers of the surviving corporation after the Effective Time.

    Conversion of Common Stock of the Manager in the Merger.  At the Effective Time, all the issued and outstanding shares of common stock of the Manager will be converted into the right to receive an aggregate of 1,287,501 shares of our common stock. No fractional shares of our common stock will be issued in the Merger, and shares of our common stock to be issued to each of the stockholders of the Manager will be rounded up or down to the nearest whole share.

Indemnification

    AFC has agreed to indemnify and hold harmless our company and our directors, officers, employees, affiliates, agents and permitted assigns from and against: (i) any and all damages resulting from the inaccuracy of representations or warranties or breach or non-fulfillment of any covenant or agreement in the Merger Agreement; (ii) (A) taxes payable by or on behalf of, or attributable to, the Manager for any taxable period ended prior to or ending on the Effective Time, (B) taxes of any member of a consolidated or combined tax group of which the Manager is, or was at any time, part, for which the Manager is jointly or severally liable as a result of its inclusion in such group prior to the Effective Time, (C) any claim or demand for reimbursement or indemnification resulting from any transfer of tax benefits or credits by the Manager to any other person and (D) any taxes payable by us as a result of any breach of any representation or warranty contained in a specified section of the Merger Agreement relating to taxes; (iii) (A) any damages arising out of or relating to any employee plan maintained or sponsored by us or any ERISA affiliate and (B) any damages arising out of or relating to any employee retirement or benefit plan maintained or sponsored by the Manager, AFC or any affiliate which is not an employee plan; and (iv) any liability arising under the advisory agreement prior to the Effective Time. Each Manager Stockholder agrees to severally indemnify and hold harmless our company and our directors, officers, employees, affiliates, agents and permitted assigns from and against any and all damages asserted against, imposed upon or incurred or suffered by it,

40

directly or indirectly, as a result of, or based upon or arising from any inaccuracy in or breach or non-fulfillment of, any of the representations, warranties, covenants or agreements made by them in the Merger Agreement. We have agreed to indemnify and hold harmless the Manager, AFC and the Manager Stockholders and their respective directors, officers, employees, affiliates, agents and permitted assigns, without duplication, from and against any and all damages asserted against, imposed upon or incurred or suffered by any of them, directly or indirectly, as a result of, or based upon or arising from any inaccuracy in or breach or non-fulfillment of any of the representations, warranties, covenants or agreements made by us in the Merger Agreement.

    AFC and the Manager Stockholders will escrow shares of our common stock they receive in the Merger having a value of $2,750,000 for the first year following the Effective Time and having a value of $1,600,000 for the following two years to cover their indemnification obligations. Alternatively, in lieu of escrowing shares, they can obtain an insurance policy for the benefit of our company to cover their indemnification obligations, subject to our approval of such insurance policy. The insurance policy will provide coverage up to $2,750,000 and we will not be subject to any deductible or reduction requirements. The value of the shares deposited in escrow, or, alternatively, the insurance policy coverage, also constitutes the limit on any liabilities of AFC and the Manager Stockholders arising under the Merger Agreement.

Representations and Warranties

    Representations and Warranties Regarding the Manager.  The Merger Agreement includes customary representations and warranties of the Manager and AFC with respect to the Manager as to, among other things:

•

the due organization, standing, power and authority and similar corporate matters;



•

the due authorization of the Merger Agreement and the transactions contemplated thereby;



•

the capitalization of the Manager;



•

the absence of litigation;



•

employee matters;



•

the Manager's compliance with applicable laws;



•

tax matters;



•

intellectual property rights;



•

the Manager's financial statements;



•

the accuracy of the books of account and other financial records of the Manager;



•

the absence of any material adverse change; and



•

title to assets.

    Representations and Warranties Regarding AFC and each of the Manager Stockholders.  The Merger Agreement also includes representations and warranties of each of AFC and the Manager Stockholders as to, among other things:

•

its power and authority to enter into the Merger Agreement and to consummate the transactions contemplated thereby;



•

the due authorization of the Merger Agreement;



•

their ownership of the Manager; and

41

•

acknowledgement by AFC and each of the Manager Stockholders, of certain securities laws restrictions on transferability of our common stock to be received by them in connection with the Merger.

    Representations and Warranties Regarding our Company.  The Merger Agreement also includes our representations and warranties as to, among other things:

•

our corporate organization, standing and power and authority;



•

our capitalization;



•

the due authorization and approval of the Merger Agreement and the transactions contemplated thereby;



•

the validity of our common stock to be issued as Merger Consideration;



•

our financial statements;



•

the absence of any material change;



•

the timely filing of, and compliance as to form with, all SEC reports, Proxy Statements or other documents; and



•

the absence of litigation.

Covenants

    The Merger Agreement contains a number of customary and transaction-specific covenants, including, among other things, the following:

•

business of the Manager pending the Merger;



•

payment of the accrued and unpaid management fee; and



•

certain employment matters.

Employee Matters

    As part of the Merger, we will assume the current employment contracts of each of Messrs. Zimmerman, Gorin and Freydberg subject to the following modifications effective as of the later of January 1, 2002 or the Effective Time: (i) the annual salaries of each of Messrs. Zimmerman, Gorin and Freydberg will increase to $300,000, $200,000 and $200,000, respectively; (ii) the three executives will, in the aggregate, be entitled to participate in an annual bonus pool of at least $225,000; (iii) the three executives will, in the aggregate, be entitled to participate in an equity raise bonus pool equal to 0.65% of the net amount of equity capital raised by us during the term of their contracts beginning on the date these modifications take effect; (iv) each of the three executives will be entitled to a payment of a lump sum amount of 300% of the sum of their respective current base salaries plus their prior year bonuses under certain circumstances relating to a change in control of our company; and (v) the three executives will each be subject to a one-year noncompetition provision following their termination has been added. Additionally, we have agreed to assume approximately $150,000 of bonus obligations to these employees and certain bonus obligations relating to any equity raises that take place between the signing of the Merger Agreement and the consummation of the Merger.

    For a more detailed discussion of the terms of any employment or compensation arrangements not being modified, please refer to our Proxy Statement on Schedule 14A, dated April 13, 2001, for our Annual Meeting of Stockholders held on May 24, 2001, which is incorporated by reference herein.

42

Conditions to Consummation of the Merger

    Conditions to Each Party's Obligations to Effect the Merger.  The respective obligations of our company, the Manager, AFC and the Manager Stockholders to effect the Merger will be subject to certain conditions, including the following:

•

the issuance of shares of our common stock pursuant to, and the other transactions contemplated by, the Merger Agreement will have been duly approved by the holders of our common stock;



•

there will not be in effect any judgment, writ, order, injunction or decree of any court or governmental body enjoining or otherwise preventing consummation of the transactions contemplated by the Merger Agreement nor will there be pending or threatened by any governmental body or other person any suit, action or proceeding seeking to restrain or restrict the consummation of the Merger or seeking damages in connection therewith which, in the reasonable judgment of our company or the Manager, could have a material adverse effect;



•

at the Effective Time, there will be no suspension of trading activity in the stock market, banking moratoriums, suspension of the extension of credit by lending institutions, war or other major calamities (or any material worsening thereof);



•

our receipt of an opinion of Kutak, counsel to the Manager, which will include, among other things, an opinion that the Merger will qualify as a tax-free reorganization under Section 368(a) of the Code;



•

we, AFC and the Manager Stockholders shall have entered into the Registration Rights Agreement, the Escrow Agreement and other contracts and agreements contemplated by the Merger Agreement; and



•

no material adverse change shall have occurred.

    Additionally, our obligation to effect the Merger will be subject to certain conditions, including the following:

•

our due diligence review shall have been completed to our satisfaction;



•

the receipt of noncompetition agreements from AFC and Mr. Yanney; and



•

modifications to the employment agreements of Messrs. Zimmerman, Gorin and Freydberg shall have been executed.

Amendment; Waiver; Termination

    Amendment.  The Merger Agreement may be amended at any time by written agreement signed by us, the AFC, the Manager Stockholders and the Manager (prior to the Effective Time), as applicable.

    Waiver.  Any party to the Merger Agreement may extend the time for the performance of any of the obligations or other acts of any other party thereto, or waive compliance with any of the agreements or any condition to the obligations thereunder of any other party thereto, to the extent that such obligations, agreements and conditions are intended for its benefit.

    Termination.  The Merger may be abandoned and the Merger Agreement may be terminated prior to the Effective Time, before or after approval by our stockholders, either by:

•

the mutual written consent of our company and the Manager;



•

by either party if the Merger is not consummated by March 31, 2002;

43

•

if a United States federal or state court, regulatory agency or other governmental body will have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Merger Agreement and such order, decree, ruling or other action will have become final and non-appealable, provided, that the party seeking to terminate the Merger Agreement will have used all reasonable efforts to remove such order, decree, ruling or other action;



•

by either party if a condition to their obligation is not met; or



•

by either party if the other has breached any representation, warranty or covenant.

    Any termination of the Merger Agreement will relieve all parties of any liability or further obligation as a result of the Merger or the Merger Agreement.

Resale of Shares of MFA Common Stock Issued in the Merger

    The shares of common stock issued pursuant to the Merger Agreement will not be registered under the Securities Act (unless subsequently registered pursuant to the Registration Rights Agreement) and, therefore, will not be freely transferable under the Securities Act. Such shares must be held indefinitely unless:

•

the distribution thereof is registered under the Securities Act;



•

they are sold in conformity with Rule 144 promulgated by the SEC under the Securities Act; and/or



•

some other exemption from registration is available.

    Additionally, AFC and the Manager Stockholders have agreed to not sell, pledge or otherwise transfer the MFA Common Stock they receive in the Merger for a period of 12 months after the Merger; provided, that AFC is permitted to immediately sell up to 206,000 of such shares subject to certain securities law restrictions.

Survival of Representations, Warranties and Covenants

    The representations and warranties of the parties contained in the Merger Agreement or in any certificate delivered pursuant to or in connection with the Merger Agreement will survive the closing date but will terminate on the first anniversary of the Closing Date, except that certain representations and warranties of the Manager and AFC concerning employee benefits plans, tax matters and capitalization and ownership will terminate 60 days following the termination of the expiration of the normal statute of limitations applicable to such matters. The covenants and agreements set forth in the Merger Agreement will not survive the closing date, except those that expressly contemplate performance after the closing date.

Expenses and Fees

    Unless expressly provided for in the Merger Agreement, each party will bear its own expenses, including the fees and expenses of any attorneys, accountants, investment bankers, brokers, finders or other intermediaries, incurred in connection with the Merger Agreement and the transactions contemplated thereby; provided, however, that if the Merger occurs, we will bear all expenses of the preparation of this Proxy Statement and certain other matters specified in the Merger Agreement.

Registration Rights

    As a condition to the Merger, we have agreed to enter into an agreement (the "Registration Rights Agreement") with AFC and the Manager Stockholders under which AFC and the other

44

Manager Stockholders may require us to register the common stock to be issued to them in connection with the Merger for resale under federal securities laws. Under the Registration Rights Agreement, AFC may request that we register up to 206,000 shares of our common stock it receives in the Merger or at anytime following the Effective Time. In addition, AFC and the Manager Stockholders may request that the remaining shares of our common stock issued in the Merger be registered for resale under the federal securities laws at anytime following the first anniversary of the Effective Time. Once registered, AFC and the Manager Stockholders may sell these shares pursuant to such registration, subject to the provisions of the Registration Rights Agreement and the escrow agreement. A registration will not be deemed to have been effected until the registration statement filed in connection therewith is declared effective by the SEC. We will bear costs of the registration, including, among other things, registration and filing fees, printing expenses, attorneys' fees, accountants' fees and other reasonable expenses.

    If we determine that, in light of the pendency of a material transaction, it would be materially detrimental to the Company and our stockholders to file a registration statement pursuant to a request therefor by AFC and/or the Manager Stockholders, we may defer such registration for not more than 90 days after receipt of such request. We also are permitted to defer the filing of a registration statement pursuant to such a request for an additional period of 60 days after the expiration of the initial 90 day period in order to satisfy our disclosure obligations under the Securities Act with respect to certain material transactions.

    If we propose to file a registration statement covering our common stock under the Securities Act (except for registration (a) on Form S-8, or a successor or substantially similar form, of an employee share option, share purchase or compensation plan or of our common stock issued or issuable pursuant to any such plan, (b) of a dividend reinvestment plan or (c) on Form S-4, or a successor or substantially similar form, of shares issuable in connection with any acquisition, merger, exchange or similar transaction) we will, subject to certain limitations, use our best efforts to arrange to include in such registration statement all of our common stock issued to AFC and/or the other Manager Stockholders issued in the Merger as to which we have received a request for inclusion. Such common stock will not be included, however, to the extent that the underwriters indicate that such inclusion will interfere with the successful marketing of the common stock being issued by us.

45

PRINCIPAL STOCKHOLDERS/OWNERSHIP OF MANAGEMENT

    As of November 9, 2001, our directors and executive officers beneficially owned the following shares of our common stock. We do not believe that, prior to the Merger, any stockholder owns more than 5% of our common stock.

*

Less than 1% of class.

⁽¹⁾

Each director and executive officer has sole voting and investment power over the shares he beneficially owns, and all such shares are owned directly unless otherwise indicated.

⁽²⁾

Includes 36,600 shares of our common stock which are owned of record by Torrey Lake Charitable Remainder Trust and Torrey Lake Charitable Remainder Trust II, both of which have as their beneficiary an entity which Mr. Yanney controls, and 192,500 shares of our common stock which may be acquired within 60 days of November 9, 2001, pursuant to the exercise of options by Mr. Yanney.

⁽³⁾

Includes 1,030,000 shares of our common stock to be issued to AFC, an entity that Mr. Yanney controls, in the Merger.

⁽⁴⁾

Includes 175,000, 106,250, 126,250, 5,000, 75,000, 5,000, and 5,000 shares of our common stock which may be acquired within 60 days of November 9, 2001, pursuant to the exercise of options by Messrs. Zimmerman, Gorin, Freydberg, Dahir, Krauss, Medinger and Scott, respectively, and 690,000 shares which may be acquired within 60 days of November 9, 2001, pursuant to the exercise of options by all executive officers and directors as a group.

⁽⁵⁾

Includes 132,999, 81,499 and 43,003 shares of our common stock to be issued in the Merger to Messrs. Zimmerman, Gorin and Freydberg, respectively.

46

FEDERAL INCOME TAX CONSIDERATIONS

General

    The following discussion summarizes material federal income tax considerations from the Merger to us and our stockholders. This discussion does not address the tax consequences to the Manager or AFC arising from the Merger. This discussion is general in nature and is not tax advice. In addition, no representations are made as to state, local or foreign tax consequences to us or any of our stockholders resulting from the Merger.

Tax Treatment of the Merger

    General.  We intend to treat the Merger as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, we will have the same tax basis in the assets of the Manager as the Manager had in its assets. If the Merger fails to qualify as a tax-free reorganization, the Merger would be treated as a taxable sale by the Manager of its assets to us in exchange for our common stock, followed by the Manager's distribution to AFC and the Manager Stockholders of our common stock received in the exchange in complete liquidation of the Manager. We would not directly recognize gain or loss as a result of the failure of the Merger to qualify as a reorganization under Section 368(a) of the Code. We could be liable for the Manager's tax liability from a deemed sale of the Manager assets as a successor to the Manager if AFC or the Manager Stockholders were unable to pay tax liabilities either from such deemed sale or unrelated transactions.

Built-in Gain Rules

    Under the "Built-in Gain Rules" of Temporary Treasury Regulation § 1.337(d)-5T and IRS Notice 88-19, a REIT is subject to a corporate tax if it disposes of any assets acquired from a C corporation in a carryover basis transaction (including a statutory merger qualifying as a tax-free reorganization) during the 10-year period beginning on the date of the transaction (the "Recognition Period"). This tax is imposed at the top regular corporate rate (currently 35%) on the lesser of (i) any gain recognized during the Recognition Period on the disposition of such asset, or (ii) the "Built-in Gain" in such asset (i.e., the excess of (a) the fair market value of such asset over (b) our adjusted basis in such asset) as of the beginning of such Recognition Period. Our adjusted basis in the assets we are acquiring from the Manager will be de minimis, and therefore any sale of assets would be expected to generate gain. The results described above with respect to the recognition of Built-in Gain assume that we will make a certain election pursuant to Temporary Treasury Regulation § 1.337(d)-5T(b)(3) and Notice 88-19. We have agreed to make such election.

    The extent to which the Built-in Gain Rules apply to the merger of a corporation (such as the Manager) into a REIT (such as us) is unclear. However, we do not intend to recognize any gain in respect of any of the assets acquired in the Merger during the Recognition Period.

Consequences of Merger on Our Qualification as a REIT—Earnings and Profits Distribution Requirement

    A REIT is not permitted to have accumulated earnings and profits attributable to non-REIT years. A REIT has until the close of its first taxable year in which it has non-REIT earnings and profits to distribute such earnings and profits. In a statutory merger qualifying as a tax-free reorganization, the acquired corporation's earnings and profits are generally carried over to the surviving corporation. Any earnings and profits treated as having been acquired by a REIT through such a merger will be treated as accumulated earnings and profits of the REIT attributable to non-REIT years. We have requested that PricewaterhouseCoopers LLP determine the earnings and profits of the Manager for purposes of the earnings and profits distribution requirement. Subject to certain qualifications and assumptions,

47

PricewaterhouseCoopers LLP has preliminarily determined that the Manager will not have any current or accumulated earnings and profits as of the date of the Merger.

    The calculation of the amount of earnings and profits acquired by us from the Manager is subject to challenge by the IRS. The IRS may examine prior tax returns of the Manager and propose adjustments that would increase its taxable income, which would result in corresponding increases in the Manager's earnings and profits.

    If the IRS determines, and successfully asserts, that we had acquired current or accumulated earnings and profits from the Manager ("Acquired Earnings") and we had not distributed all of the Acquired Earnings prior to the end of our taxable year during which the Merger occurs, we would fail to qualify as a REIT in such year, as well as other taxable years during which we held such Acquired Earnings. However, if we made an additional distribution within 90 days of such a determination by the IRS to distribute the Acquired Earnings and paid to the IRS an interest charge based on 50% of the amount of such Acquired Earnings not previously distributed, our failure to have distributed the Acquired Earnings would not prevent us from qualifying as a REIT. Accordingly, in order to maintain our qualification as a REIT under such circumstances, we could be required to borrow funds on a short-term basis or sell assets in order to meet the additional distribution requirement even if the prevailing market conditions were not generally favorable for such borrowings or sales.

    If we fail to qualify for taxation as a REIT in any taxable year, we will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. As a result, our failure to qualify as a REIT would reduce the cash available for distribution to our stockholders. Distributions to our stockholders in any year in which we fail to qualify as a REIT will not be deductible by us nor will such distributions be required to be made. In addition, if we fail to qualify as a REIT, all distributions to our stockholders will be taxable to them as ordinary income to the extent of current and accumulated earnings and profits, and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Moreover, in the absence of certain relief, we could not elect to be taxed as a REIT for the four years following such disqualification and could be subject to taxation on our built-in gain upon re-electing REIT status as described under the "Built-In Gain Rules" described above.

48

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

General

    We were incorporated in Maryland on July 24, 1997. We began operations on April 10, 1998 when we merged with the Prep Funds. Concurrent with our merger with the Prep Funds, we entered into an advisory agreement with the Manager and adopted an investment policy that significantly differed from that pursued by the Prep Funds.

    The Manager provides advisory services to us in connection with the conduct of our business activities. Our principal investment strategy includes leveraged investing in adjustable-rate mortgage securities. Our investment strategy also provides for the acquisition of multifamily housing properties, REIT securities and high-yield corporate securities.

    We have elected to become subject to tax as a REIT for federal income tax purposes beginning with our 1998 taxable year and, as such, we have distributed, and anticipate in the future distributing, on an annual basis at least 90% (95% prior to January 1, 2001) of our taxable income, subject to certain adjustments. Generally, cash for such distributions is expected to be largely generated from our operations, although we may borrow funds to make distributions. We declared the following dividends during 2001 and 2000:

    Our operations for any period may be affected by a number of factors including the investment assets held, general economic conditions affecting underlying borrowers and, most significantly, factors which affect the interest rate market. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control.

Results of Operations

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

    During the three months ended September 30, 2001, our total interest and dividend income increased $7.53 million (82.3%) compared to the same period in the prior year. Mortgage securities income increased $7.63 million (91.8%) from $8.31 million to $15.94 million; income recognized on short-term investments in cash and cash equivalents increased $0.1 million. Increases in income from mortgage securities and income on cash and cash equivalents were partially offset by decreases in income from corporate debt securities and dividends of $0.2 million (26.2%). The increase in mortgage securities income was primarily the result of an increase in our mortgage securities portfolio of $877.4 million (178.5%) from $491.6 million as of September 30, 2000 to $1.369 billion as of September 30, 2001. The decrease in corporate debt securities and dividend income is primarily

49

attributable to a reduction in the average amount invested in such securities as a result of sales of the underlying investments.

    Our interest expense increased $2.4 million (31.3%) for the three months ended September 30, 2001, compared to the same period in 2000. Such increase is primarily due to an increase of $807.5 million (170.6%) in our repurchase agreements balances from $473.4 million as of September 30, 2000 to $1.281 billion as of September 30, 2001 partially offset by a decrease in our average interest cost from 6.62% to 3.87% for the three months ended September 30, 2000 and 2001, respectively.

    As a result of the increase in our mortgage securities portfolio and the widening of our interest rate margin (calculated by dividing annualized net interest and dividend income by average interest earning assets), net interest and dividend income increased $5.1 million (382.8%) from $1.3 million to $6.4 million for the three months ended September 30, 2000 and 2001, respectively.

    Income from other investments decreased $2.7 million for the three months ended September 30, 2001, compared to the same period in 2000. Included in such income for the three months ended September 30, 2000 is a gain of approximately $2.6 million which resulted from the sale of the underlying real estate of an unconsolidated real estate limited partnership. The remaining decrease of $0.1 million is the result of a reduction in income generated by our investments in unconsolidated real estate limited partnerships.

    We recognized a net loss of approximately $124,000 resulting from the sales of certain corporate debt and equity investments during the three months ended September 30, 2001 compared to a net gain of approximately $53,000 resulting from the sales of certain corporate equity securities during the three months ended September 30, 2000. Such 2001 losses resulted from the sales of certain corporate debt and equity securities of approximately $409,000 offset by gains from the sales of certain corporate debt and equity securities of approximately $285,000.

    Our general and administrative expenses for the three months ended September 30, 2001 increased $0.4 million as compared to the three months ended September 30, 2000. Such increase is primarily attributable to higher base management and incentive compensation fees earned by the Manager due to an increase in income we generated.

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

    During the nine months ended September 30, 2001, our total interest and dividend income increased $7.52 million (27.9%) compared to the same period in the prior year. Mortgage securities income increased $7.19 million (28.9%) from $24.92 million to $32.11 million. Income recognized on short-term investments in cash and cash equivalents increased $0.12 million and income from corporate debt securities increased $0.36 million. Increases in income from mortgage securities, income on cash and cash equivalents and interest on corporate debt securities were partially offset by a decrease in dividend income of $0.15 million. The increase in mortgage securities income was primarily the result of an increase in our mortgage securities portfolio of $877.4 million (178.5%) from $491.6 million as of September 30, 2000 to $1.369 billion as of September 30, 2001. The increase in income from corporate debt securities and income on short-term investments in cash and cash equivalents was primarily the result of an increase in the average balances of such investments during the period. The decrease in dividend income is primarily attributable to a reduction in the average amount invested in such securities as a result of sales of the underlying investments.

    Our interest expense increased $0.2 million for the nine months ended September 30, 2001, compared to the same period in 2000. Although our repurchase agreements balances increased $807.5 million from $473.4 million as of September 30, 2000 to $1.281 billion as of September 30, 2001,

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our average interest cost decreased from 6.46% to 4.55% for the nine months ended September 30, 2000 and 2001, respectively.

    As a result of the widening of our interest rate margin, net interest and dividend income increased $7.32 million (159.3%) from $4.60 million to $11.92 million for the nine months ended September 30, 2000 and 2001, respectively.

    Income from other investments decreased approximately $0.2 million for the nine months ended September 30, 2001, compared to the same period in 2000 as a result of a reduction in income generated by our investments in unconsolidated real estate limited partnerships. Included in such income for the nine months ended September 30, 2001 is a gain of approximately $2.6 million which resulted from the sale by a non-consolidated subsidiary of its undivided interest in the net assets of an assisted living center. Included in such income for the nine months ended September 30, 2000 is a gain of approximately $2.6 million which resulted from the sale of the underlying real estate of an unconsolidated real estate limited partnership.

    We recognized a net loss of approximately $0.38 million on our investments during the nine months ended September 30, 2001. Such net loss resulted from permanent impairment losses recognized on one of each of our investments in corporate debt and equity securities totaling approximately $0.4 million. In addition, we recognized losses of approximately $1.01 million on sales of certain corporate debt and equity securities. Such losses were partially offset by gains on sales of commercial mortgage securities and corporate debt and equity securities of approximately $1.03 million. This compares to a net gain of $0.17 million recognized during the nine months ended September 30, 2000 resulting from the sale of corporate debt securities and corporate equity securities for a gain of $0.36 million which was partially offset by a loss of approximately $0.19 million on the sale of numerous small pools of fixed-rate mortgage securities.

    Our general and administrative expenses for the nine months ended September 30, 2001 increased $1.4 million as compared to the nine months ended September 30, 2000. Such increase is primarily attributable to higher base management and incentive compensation fees earned by the Manager.

    Year Ended December 31, 2000, Compared to Year Ended December 31, 1999

    During the year ended December 31, 2000, total interest income earned by us increased $10.6 million (41%) compared to total interest income earned in 1999. This increase is primarily attributable to a 33% growth in our average interest earning assets from $382 million to $507 million for the years ended December 31, 1999 and 2000, respectively. Also contributing to the increase was a 6.4% growth in the yield on our interest earning assets from 6.72% per annum in 1999 to 7.15% per annum in 2000.

    Our interest expense increased $11.6 million (63%) for the year ended December 31, 2000 compared to 1999 due to a 40% increase in the average repurchase agreement balance from $321 million in 1999 to $450 million in 2000, as well as an increase in the average interest cost from 5.75% per annum in 1999 to 6.68% per annum in 2000. We had outstanding borrowings of $449 million at December 31, 2000 compared to $452 million at December 31, 1999.

    Our interest rate margin was 1.22% for the year ended December 31, 2000 compared to 1.89% for the year ended December 31, 1999. As a result of the narrowing of such margin, net interest and dividend income decreased $1.0 million (14%) from $7.2 million to $6.2 million for the years ended December 31, 1999 and 2000, respectively.

    Income from other investments increased from $3.0 million to $3.7 million for the years ended December 31, 2000 and 1999, respectively. Included in such income for the year ended December 31, 2000 is a gain of approximately $2.6 million which resulted from the sale of the underlying real estate of an unconsolidated real estate limited partnership. Included in such income for the year ended

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December 31, 1999 is approximately $2.2 million attributable to a gain recognized by a non-consolidated subsidiary's sale of its undivided interests in the net assets of four assisted living centers. Excluding such sales, income from other investments increased $300,000 due to higher income generated by our investments in unconsolidated real estate limited partnerships.

    During the year ended December 31, 2000, we realized a net gain of $500,000 on the sale of investments compared to a net gain of $100,000 during the year ended December 31, 1999. Such gains resulted from the sale of corporate debt and equity securities and the sale and/or payoff of several pools of fixed-rate mortgage securities.

    Our general and administrative expenses decreased $200,000 (8%) for the year ended December 31, 2000, compared to the same period of 1999. Approximately $100,000 of such decrease is due to expenses incurred in 1999 by a consolidated subsidiary which was liquidated in December 1999. The remaining $100,000 decrease is primarily attributable to net decreases in various general and administrative expenses, including various servicing fees, filing fees and printing costs.

Liquidity and Capital Resources

    Our principal sources of capital consist of borrowings under repurchase agreements, principal payments received on our portfolio of mortgage securities, cash provided by operations and proceeds from public equity offerings. Principal uses of cash include the acquisition of mortgage securities, the payment of operating expenses and the payment of dividends to stockholders.

    During the nine months ended September 30, 2001, we acquired $1.041 billion of mortgage securities and corporate equity securities. Financing for these acquisitions was provided primarily through the utilization of repurchase agreements, supplemented by cash flow from operations and net proceeds from the June 2001 public offering of our common stock. Net borrowings under repurchase agreements totaled $832.4 million during the nine months ended September 30, 2001. We also received principal payments of $147.9 million on our mortgage securities and proceeds of $13.2 million from the sale of mortgage securities, corporate debt securities and corporate equity securities during the nine months ended September 30, 2001. Other uses of funds during the nine months ended September 30, 2001 included $3.3 million primarily for the acquisition of an interest in a multifamily housing property and $6.3 million for dividend payments.

    Our borrowings under repurchase agreements totaled $1.281 billion at September 30, 2001, and had a weighted average borrowing rate of 3.62% as of such date. At September 30, 2001, the repurchase agreements had balances of between $0.2 million and $68.0 million. These arrangements generally have original terms to maturity ranging from one month to twelve months and annual interest rates that are generally based on LIBOR. To date, we have not had margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledged collateral.

    On June 27, 2001, we closed a public offering of 10,335,214 shares of our common stock. The offering included the full exercise of the underwriters' option to purchase up to 1,335,214 additional shares to cover over-allotments. The shares were priced at $7.00 per share and we received net proceeds of approximately $67.1 million. Net proceeds of this offering were fully utilized to acquire additional adjustable-rate mortgage securities during the three months ended September 30, 2001.

    On September 25, 2001, we filed a registration statement with the Securities and Exchange Commission relating to $300,000,000 of our common stock and preferred stock that we may offer from time to time for cash in a variety of transactions, including underwritten public offerings. On November 7, 2001, we closed an underwritten public offering of 8,000,000 shares of our common stock pursuant to this registration statement. As of that date, the underwriters had not exercised their option to purchase up to 1,200,000 additional shares to cover over-allotments. The shares were sold at a public offering price of $8.00 per share, and we received net proceeds of approximately $59.7 million. We

52

anticipate using the net proceeds of this offering to acquire additional adjustable-rate mortgage securities on a leveraged basis during the fourth quarter of 2001. To the extent we raise additional equity capital from future sales of common and/or preferred stock under this registration statement, we anticipate using the net proceeds to acquire additional mortgage securities, interests in multifamily apartment properties and other investments consistent with our investment policies. There can be no assurance, however, that we will be able to raise additional equity capital at any particular time or on any particular terms.

    The primary components of our general and administrative expenses are the base advisory and incentive compensation fees paid to the Manager. If the Merger is completed, the employees of the Manager will become our employees and we will assume all of the costs of operating our business, some of which are currently paid by the Manager. In addition, our obligation to pay the base advisory and incentive compensation fees to the Manager will terminate upon the closing of the Merger. Although there can be no assurances in this regard, we believe that, under current market conditions, the additional costs we expect to incur in operating on a self-advised basis will be less than the amount of the fees that would be payable to the Manager if the Merger does not occur. In addition, under the Merger Agreement, we will issue 1,287,501 shares of our common stock to the stockholders of the Manager. These shares will represent approximately 4.5% of our total outstanding shares of common stock upon completion of the Merger. However, although there can be no assurances in this regard, we believe that under current market conditions, the cost savings associated with becoming self-advised will more than offset the dilutive effect caused by the issuance of these additional shares in the Merger.

    We believe we have adequate financial resources to meet our obligations as they come due and fund committed dividends as well as to actively pursue our investment policies.

    The terrorist attacks which occurred in New York City and Washington, D.C. on September 11, 2001, and the subsequent military actions taken by the United States and its allies in response, have caused significant uncertainty in the global financial markets. While the short-term and long-term affects of these events and their potential consequences are uncertain, they could have a material adverse effect on general economic conditions, consumer confidence and market liquidity. Among other things, it is possible that short-term interest rates may be affected by these events. If short-term interest rates increase rapidly, it would cause our borrowing costs to increase faster than increases in the interest rates we earn on our adjustable rate mortgage securities. If that were to happen, our earnings would be negatively affected. In addition, the rate of prepayment on the mortgages underlying our mortgage securities could increase as a result of adverse economic conditions, changes in interest rates and other factors, all of which could be affected by the events of September 11, 2001 and their aftermath.

New Accounting Pronouncements

    In June, 1998, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). Certain provisions of FAS 133 were amended by Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("FAS 138") in June, 2000. These statements provide new accounting and reporting standards for the use of derivative instruments. Although we have not historically used such instruments, we are not precluded from doing so. In the future, we anticipate using such derivative instruments only as hedges to manage interest rate risk. We do not anticipate entering into derivatives for speculative or trading purposes. As of January 1, 2001, we had no outstanding derivative hedging instruments nor any imbedded derivatives requiring bifurcation and separate accounting under FAS 133, as amended. Accordingly, there was no cumulative effect upon adoption of FAS 133, as amended, on January 1, 2001.

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    In September, 2000, the FASB issued Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 140"). This statement is applicable for transfers of assets and extinguishments of liabilities occurring after March 31, 2001. We adopted the provisions of this statement as required for all transactions we entered into on or after April 1, 2001. The adoption of FAS 140 did not have a significant impact on us.

    In July, 2001, the FASB issued Financial Accounting Standards (FAS) No. 141, "Business Combinations" and FAS No. 142, "Goodwill and Other Intangible Assets" which provide guidance on how entities are to account for business combinations and for the goodwill and other intangible assets that arise from those combinations or are acquired otherwise. These standards are effective for us on January 1, 2002.

    FAS 142 will require that goodwill no longer be amortized, but instead be tested for impairment at least annually. As of the date of adoption, we expect to have unamortized goodwill in the amount of approximately $7,189,000. Amortization expense related to such goodwill was approximately $150,000 for the nine month period ended September 30, 2001 and is expected to be approximately $200,000 for the year ended December 31, 2001. We expect to adopt such statement effective January 1, 2002, as required but have not yet completed our evaluation as to the potential implications to the financial statements.

    In October, 2001, the FASB issued Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The provisions of FAS 144 are effective for us on January 1, 2002. The adoption of FAS 144 is not expected to have a significant impact on us.

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THE ADVISORY AGREEMENT

General

    At our inception, we entered into an advisory agreement with the Manager for a period of five years. Pursuant to the advisory agreement, the Manager currently advises us on various facets of our business and manages our day-to-day operations, subject to the supervision of our Board of Directors.

    Subject to its duty of overall supervision, our Board of Directors has delegated to the Manager the power and duty to, among other things:

•

administer our day-to-day operations and perform or supervise the performance of such administrative functions necessary in our management as may be agreed upon by the Manager and our Board of Directors, including, without limitation, collection of revenues and payment of expenses, debts and obligations and maintenance of appropriate computer services to provide such administrative functions;



•

serve as our consultant with respect to formulation of investment criteria and preparation of policy guidelines by our Board of Directors;



•

represent us in connection with the purchase, accumulation, financing and securitization of mortgage assets;



•

supervise our compliance with REIT provisions of the Code;



•

maintain our bank accounts and records deemed appropriate or requested by our Board of Directors; and



•

provide executive and administrative personnel and services required in rendering the services agreed upon in the advisory agreement.

Compensation

    Under the terms of the advisory agreement, we pay the Manager, for services rendered under the advisory agreement, an annual base advisory fee in an amount equal to 1.10% of the first $300 million of our stockholders' equity, plus 0.80% of the portion of our stockholders' equity above $300 million, payable each month (pro rated based on the number of dates elapsed during any partial month) in arrears, commencing in April 1998. The Manager calculates the base advisory fee within 15 days after the end of the month, and is required to deliver such calculation to us promptly. We pay the base advisory fee for each month within 30 days after the end of each month. If our annualized return on equity for any fiscal quarter (compounded by multiplying the return on equity for such fiscal quarter by four) is in excess of the Ten-Year U.S. Treasury Rate plus 1%, we pay the Manager as incentive compensation for such quarter an amount equal to 20% of the dollar amount by which our annualized return on equity for such fiscal quarter exceeds the amount necessary to provide an annualized return on equity equal to the Ten-Year U.S. Treasury Rate plus 1%. The Manager computes the incentive compensation within 45 days after the end of each fiscal quarter. We pay the incentive compensation with respect to each fiscal quarter within 15 days following the delivery to us of the Manager's written statement setting forth the computation of the incentive fee for such quarter. If an affiliate of the Manager extends loans to us, the maximum amount of interest that such affiliate may charge is the prime rate publicly announced by Citibank, N.A. from time to time plus 1% per year.

Competition

    Nothing prevents the Manager or any of its affiliates from engaging in other businesses or from rendering services of any kind to any other person or entity, including investment in or advisory service to others investing in any type of real estate investment, including investments which meet our principal

55

investments. Directors, officers, employees and agents of the Manager may serve as our directors, officers, employees, agents, nominees or signatories, to the extent permitted by its governing instruments, or by any resolution duly adopted by our Board of Directors. However, if the stockholders approve the Merger Proposal, AFC, the largest stockholder of the Manager, and Mr. Michael B. Yanney, who holds the largest membership interest in AFC, will agree not to compete with the Company in the business of residential mortgage-backed securities for a period of one year after the Effective Time.

Termination

    The advisory agreement commenced April 9, 1998 and will continue in force for a period of five years and thereafter may be extended only with the consent of the Manager and by the affirmative vote of a majority of our Board of Directors, including a majority of the independent directors. The advisory agreement may be terminated for any reason upon 60 days written notice by either party to the advisory agreement. We may, upon 60 days' written notice, terminate the advisory agreement for cause. In the event the advisory agreement is terminated by us without cause, we will be obligated to pay the Manager a termination or non-renewal fee determined based on an independent appraisal from an independent party jointly selected by us and the Manager.

    The advisory agreement defines cause as any of the following events occurring:

•

the Manager has materially violated any provision of the advisory agreement and, after notice of such violation, shall have failed to cure such default within 30 days;



•

there is entered an order for relief or similar decree or order with respect to the Manager by a court having jurisdiction in an involuntary case under the federal bankruptcy laws or under any applicable federal or state bankruptcy, insolvency or other similar laws;



•

the Manager ceases, or admits in writing its inability, to pay debts as they become due and payable, or makes a general assignment for the benefit of, or enters into any composition or arrangement with, creditors;



•

the Manager applies for, or consents (by admission of material allegations of a petition or otherwise) to the appointment of a receiver, trustee, assignee, custodian, liquidator or sequestrator (or other similar official) of the Manager or of any substantial part of its properties or assets, or authorizes such an application or consent, or proceedings seeking such appointment are commenced without such authorization, consent or application against the Manager and continue undismissed for 30 days;



•

the Manager authorizes or files a voluntary petition in bankruptcy, or applies for or consents (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, arrangement, readjustment or debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction, or authorizes such application or consent, or proceedings to such end are instituted against us without such authorization, application or consent and remain undismissed for 30 days or result in adjudication of bankruptcy or insolvency; or



•

the Manager permits or suffers all or any substantial part of its properties or assets to be sequestered or attached by court order and the order remains undismissed for 30 days.

If the stockholders approve the Merger Proposal, the advisory agreement will no longer exist as the Manager will have merged into us.

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CERTAIN TRANSACTIONS AND RELATIONSHIPS

    Except as described herein, we are not a party to any transaction or proposed transaction with any person who is (i) a director or executive officer of our company, (ii) an owner of more than 5% of our common stock or (iii) a member of the immediate family of any of the foregoing persons.

    Michael B. Yanney, our Chairman of Board of Directors, George H. Krauss, one of our directors, Stewart Zimmerman, one of our directors and our President and Chief Executive Officer, and William S. Gorin, one of our executive officers, are beneficial owners of AFC. Subsidiaries of AFC engaged in the following transactions with our company during 2000 and 2001:

    The Manager manages our operations and investments and performs administrative services for us. In turn, the Manager receives an advisory fee payable monthly in arrears in an amount equal to 1.10% per annum of the first $300 million of our stockholders' equity, plus 0.80% per annum of the portion of our stockholders' equity above $300 million. We also pay the Manager, as incentive compensation for each fiscal quarter, an amount equal to 20% of the dollar amount by which the annualized return on equity for such fiscal quarter exceeds the amount necessary to provide an annualized return on equity equal to the ten-year U.S. Treasury Rate plus 1%. During 2000 and through September 30, 2001, the Manager earned a base advisory fee of $740,437 and $875,279, respectively. The Manager earned incentive compensation of approximately $797,054 and $1,753,112 in 2000 and through September 30, 2001, respectively. Approximately, $519,000 and $511,000 of the incentive fee earned in 2000 and through September 30, 2001, respectively, was attributable to the sale of the underlying real estate of a certain unconsolidated real estate limited partnership.

    America First Properties Management Company L.L.C., a wholly owned subsidiary of AFC, provides property management services for our six multifamily properties. America First Properties Management Company L.L.C. receives a management fee equal to a stated percentage of the gross revenues generated by the properties under management, ranging from 3.5% to 4% of gross revenues. Such fees paid by us in 2000 and through September 30, 2001 amounted to $374,923 and $327,334, respectively. These contracts will remain in place following the consummation of the Merger, but are terminable by us on 30 days written notice.

INDEPENDENT ACCOUNTANTS

    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 our Annual Report on 10-K have been included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of the firm as experts in auditing and accounting.

OTHER MATTERS

    Our Board of Directors knows of no other business to be presented at the Special Meeting. If other matters properly come before the meeting in accordance with our Bylaws, the persons named as proxies will vote on them in accordance with their best judgment.

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WHERE YOU CAN FIND MORE INFORMATION

    We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy these reports, proxy statements and other information without charge at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional office at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such materials from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We file reports, proxy statements and other information with the SEC electronically. The SEC maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information filed electronically with the SEC. Our shares are listed on the New York Stock Exchange under the symbol "MFA" and you may also inspect and copy our reports, Proxy Statements and other information at the offices of the New York Stock Exchange, Public Reference Section, 20 Broad Street, New York, New York, 10005.

    The SEC allows us to incorporate by reference the information we file with it, which 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 Proxy Statement and information we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings it makes with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, until the date of the special meeting:

(1)

Annual Report on Form 10-K for the fiscal year ended December 31, 2000;

(2)

Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2001, June 30, 2001 and September 30, 2001;

(3)

Proxy Statement on Schedule 14A dated April 13, 2001 for our Annual Meeting of Stockholders held on May 24, 2001;

(4)

Current Reports on Form 8-K filed on September 24, 2001, October 17, 2001 and November 2, 2001; and

(5)

The description of our shares of common stock contained in its Registration Statement on Form S-4/A filed on February 13, 1998.

    You may request a copy of each of the above-listed documents at no cost by contacting us at:

America First Mortgage Investments, Inc.
399 Park Avenue
36^th Floor
New York, New York 10022
(212) 935-8760

    Any statement contained in a document incorporated or deemed to be incorporated herein shall be deemed modified or superseded for purposes of this Proxy Statement to the extent that a statement contained herein or in any other subsequently filed document that is deemed to be incorporated herein modifies or supersedes that statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Proxy Statement.

    The Manager is not subject to the reporting requirements of the Exchange Act.

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YOUR PROXY IS IMPORTANT
WHETHER YOU OWN FEW OR MANY SHARES

    You are urged to complete, date, sign and return your Proxy Card promptly to make certain your shares will be voted at the Special Meeting, even if you plan to attend the meeting in person. If you desire to vote your shares in person at the meeting, your proxy may be revoked. For your convenience in returning the Proxy Card, a pre-addressed and postage paid envelope has been enclosed.

    Please date, sign and mail the enclosed Proxy Card today.

		By Order of the Board of Directors
				Ronald A. Freydberg Secretary
Dated: November 12, 2001

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AMERICA FIRST MORTGAGE INVESTMENTS, INC.

Index to Financial Statements

    Financial statements of one 95%-owned company, three real estate limited partnerships in which the Company owns 99% limited partnership interests and one real estate limited partnership in which the Company owns 50% limited partnership interests have been omitted because the Company's proportionate share of the income from continuing operations before income taxes is less than 20% of the respective consolidated amount, and the investment in, and advances to, each entity is less than 20% of consolidated total assets.

F–1

AMERICA FIRST MORTGAGE INVESTMENTS, INC.
PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(UNAUDITED)

See accompanying Notes to Pro Forma Financial Statements

F–2

AMERICA FIRST MORTGAGE INVESTMENTS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)