EXHIBIT I


DYNEX CAPITAL, INC.
10900 NUCKOLS ROAD - THIRD FLOOR
GLEN ALLEN, VIRGINIA 23060
804-217-5800
FAX 804-217-5861



[DYNEX LETTERHEAD]



July 6, 2000

VIA FACSIMILE

California Investment Fund, L.L.C.
550 West C Street
10th Floor
San Diego, CA 92101
Attn: Michael R. Kelly
Managing Member

Dear Mr. Kelly:

We are in receipt of your letter dated June 1, 2000 (the "Revised
Letter of Intent") which summarizes the principal terms which California
Investment Fund, L.L.C. ("CIF") has proposed concerning a potential
acquisition of Dynex Capital, Inc. and its subsidiaries ("Dynex") by CIF.
Subsequent to the receipt of the Revised Letter of Intent, certain
representatives of our financial advisor, PaineWebber Incorporated, have
had discussions with certain representatives of CIF concerning the terms
contained therein and potential modifications to such terms. The Board of
Directors of Dynex Capital, Inc. has been informed of the contents of the
Revised Letter of Intent and such subsequent discussions and has authorized
the proposed terms contained herein as a counteroffer to the terms proposed
by CIF in the Revised Letter of Intent. The preliminary proposed terms
expressed in this letter are intended to be the subject of further
negotiation and are not intended to be binding, except as set forth herein.
There is no obligation on the part of any party (other than as set for in
the next sentence) until a definitive merger agreement is entered into by
the parties, which will contain additional terms and conditions which have
yet to be agreed upon. Notwithstanding the foregoing, upon acceptance of
this letter of intent by CIF, the provisions of Paragraphs 5 and 6 will be
binding upon Dynex and CIF, and the parties agree that if any obligation
under Paragraph 5 and 6 is not complied with, the non-defaulting party will
be entitled to injunctive or other appropriate equitable relief.

1. Proposed value for Dynex Capital, Inc. outstanding stock and proposed
treatment of senior notes:

CIF, or a subsidiary of CIF ("Acquisition Sub"), would enter into a
merger transaction pursuant to which Dynex would be merged into Acquisition
Sub (the "Merger"). The aggregate purchase price paid in the Merger -
including any accumulated and unpaid dividends on Dynex's Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock
(referred to collectively herein as the "Preferred Stock") through June 30,
2000 - would be the sum of (i) $100 million plus (ii) any accumulated and
unpaid dividends on the Preferred Stock related to the period beginning
July 1, 2000 and ending on the closing date of the Merger. At June 30,
2000, the aggregate accumulated and unpaid dividends on the Preferred Stock
was $12,912,000. The Preferred Stock accumulates dividends at a rate of
$35,867 per day, based on the number of shares of each of the series of
Preferred Stock outstanding at July 1, 2000 and a 30-day month, and Dynex
would not anticipate paying any dividends to the holders of the Preferred
Stock prior to the closing of the Merger.

In the Merger, CIF would acquire all 11,444,188 issued and outstanding
shares of common stock of Dynex and all 5,051,495 issued and outstanding
shares of Preferred Stock of Dynex. The Purchase Price may be allocated to
the different classes of Dynex's stock as Dynex's Board of Directors deems
appropriate. Separately, CIF or an affiliate would acquire all the issued
and outstanding shares of common stock of Dynex's affiliate, Dynex Holding,
Inc. at its book value which approximates $200,000.

2. Proposed transaction structure (merger of equals, stock acquisition,
asset purchase or other).

We understand that CIF anticipates that the Merger will be
accomplished through the merger of Dynex into Acquisition Sub. Certain of
Dynex's assets (including the stock of the qualified REIT subsidiaries)
that may not be transferred to Acquisition Sub (which we understand is not
expected to be a REIT or a qualified REIT subsidiary) or that CIF wishes to
transfer to a REIT or a qualified REIT subsidiary will be sold by Dynex in
transactions pre-arranged by CIF immediately prior to the closing of the
Merger but after the satisfaction of all of the other conditions of
closing.

3. Anticipated financing source for completing the transaction (available
cash, new debt, existing debt lines or other).

Dynex understands that CIF anticipates that the Purchase Price will be
comprised of working capital of CIF and financing from one or more lenders
to CIF.

4. Observation rights.

Upon the execution of the definitive merger agreement, CIF shall be
granted a right to designate one person to act as an observer (the
"Observer") at Dynex's headquarters. The Observer shall also be entitled to
notice of and to attend all meeting of Dynex's Board of Directors, and to
receive any material distributed to the members of Dynex's Board of
Directors in such capacity, but will have no voting rights or rights to
participate in any discussions of Dynex's Board of Directors.
Notwithstanding the prior sentence, such Observer will not be permitted to
receive any materials or attend the portions of any meetings of the Board
that relate to any deliberation of the contemplated transactions with CIF.

5. Due diligence.

Dynex shall cooperate fully with CIF in its due diligence
investigation and will make available to CIF and its financial and legal
advisors, during normal business hours, all books, records and business and
financial information reasonably requested by CIF with respect in the
subject matter of this letter of intent during the Due Diligence Period.
During the Due Diligence Period, CIF shall cooperate fully with Dynex in
its due diligence investigation, during normal business hours, and shall
facilitate such conversations between Dynex and CIF's lenders as Dynex
shall request. The Due Diligence Period will expire upon the earlier of (a)
fourteen (14) calendar days from the date of execution by CIF of this
letter of intent, (b) written notification by CIF that it is terminating
the Due Diligence Period or (c) written notification by each of CIF and
Dynex that it is prepared to engage in exclusive negotiations in accordance
with Paragraph 6 (each, a "Notice"). During the Due Diligence Period, Dynex
agrees that CIF is allowed to contact Dynex's financial advisor. In
addition, during but not prior to the Exclusive Period (as defined below),
Dynex agrees that CIF is allowed to contact holders of Dynex's senior note
(the "Senior Notes") and stockholders in order to satisfy the conditions of
Paragraph 7.

During the Exclusive Period, CIF may negotiate with the holders of
Dynex's Senior Notes to obtain amendments to the indenture to permit the
Senior Notes to remain outstanding or to redeem the Senior Notes under such
terms as CIF may negotiate with such holders.

6. Definitive merger agreement; Exclusive period.

Subject to the conditions of Paragraph 7, upon receipt of the Notices,
CIF will be granted a fourteen (14) calendar day period (the "Exclusive
Period") in which Dynex will negotiate in good faith and exclusively with
CIF in an attempt to execute a definitive merger agreement. During the
Exclusive Period, Dynex will not discuss or negotiate with, or provide any
information to, any individual, group, joint venture, partnership,
corporation, association, trust, estate or other entity of any nature
(other than CIF and its affiliates) relating to any transaction involving
the sale of Dynex's business or Dynex's assets (other than those assets
pledged to Chase Bank of Texas ("Chase") or act as security for letters of
credit issued by Chase on Dynex's behalf) or of any of Dynex's capital
stock, or any merger, consolidation or similar transaction involving Dynex.
The parties will cooperate with each other and use their reasonable best
efforts to negotiate, prepare and execute a definitive merger agreement
during such period. During the Exclusive Period, Dynex agrees to notify
promptly and to provide a copy to CIF of any notice from any creditor
relating either to an event of default or a request of acceleration.

7. Any conditions to completing the proposed transaction.

The closing of the proposed transaction is subject to, among other
things: (i) execution of a definitive merger agreement; (ii) the approval
of the respective Boards of Directors of CIF and Dynex; (iii) the approval
of the holders of Dynex's common stock and Preferred Stock as required by
Dynex's charter and applicable law; (iv) the consent of the holders of the
Senior Notices, as necessary; (v) the receipt of all required governmental
approvals; (vi) the receipt of all material consents from third parties,
including waivers and/or restructurings of Dynex's credit lines; (vii)
Dynex not increasing its debt level above the amount reflected in its April
30, 2000 Assets Liabilities Matching Schedule; and (viii) Dynex not
changing its executive compensation by an amount greater than 10% from the
date hereof. CIF will consider the employment of certain of Dynex's key
employees, but such employment is not a condition to the closing of the
proposed transaction.

8. Right of first refusal.

In the event that Dynex receives an offer which Dynex believes to be
superior to CIF's offer during the Due Diligence Period or the Exclusive
Period, Dynex shall provide written notice to CIF of the details of the
offer. CIF shall have a five (5) business day period to revise its offer or
to terminate this letter of intent.

9. Publicity.

Except as required by law, the parties agree that there will be no
public announcements or other publicity with respect to the proposed
transaction, this letter of intent, the definitive merger agreement or any
other matters related thereto without the express written consent of CIF
and Dynex. However, it is understood that, to the extent that Dynex and CIF
enter into a definitive merger agreement, Dynex may make a public
announcement concerning such event.

10. Conduct of business.

Pending the execution of a definitive agreement, Dynex will conduct
its business only in the ordinary course of business, in a manner
consistent with past practices, without making any material change in its
business, operations or policies or paying any dividends or repurchasing
any stock. Any transaction involving the sale of assets or a group of
assets entered into after the date of this letter of intent that, in the
aggregate, is on Dynex's books with a book value in excess of $5 million
shall require the pre-approval of CIF, other than those assets that act as
security or collateral for Chase.

11. Deposit.

Upon the execution of the definitive merger agreement, CIF will
deposit into an escrow 572,178 shares of Dynex common stock owned by CIF
(the "Deposit Shares"). In the event that CIF breaches in any material
respect its obligation under the definitive merger agreement, Dynex shall
be entitled to the Deposit Shares. This remedy is not intended to be
Dynex's solo remedy in the event of any breach by CIF of its obligations
under the definitive merger agreement. First Commercial, an affiliate of
CIF, will guaranty CIF's obligations under the definitive agreement.

12. Break-up fee.

In consideration of CIF's incurrence of expenses, including the cost
of conducting its due diligence investigations, CIF shall be entitled to a
break-up fee after the execution of the definitive merger agreement if
Dynex's Board of Directors withdraws its recommendation to Dynex's
stockholders. The break-up fee shall be equal to $2.5 million. This remedy
is intended to be a liquidated damages payment and is CIF's sole remedy in
the event of any breach by Dynex of its obligations under the definitive
merger agreement.

This letter of intent will remain outstanding until 5:00 p.m. Eastern
Daylight time on July 11, 2000, at which time it will expire unless CIF has
executed this letter of intent and returned a signed copy to Dynex. Once
executed, this letter of intent shall continue in effect until the earlier
of (i) execution and delivery of a definitive merger agreement; (ii) mutual
agreement of CIF and Dynex; and (iii) the twenty-eighth day after the
execution hereof.

Dynex Capital, Inc.

By: /s/ Thomas H. Potts
-----------------------
Name: Thomas H. Potts
Title: President

Accepted and agreed to this
day of July, 2000
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California Investment Fund, I.T.C.

By:
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