EXHIBIT K


[CALIFORNIA INVESTMENT FUND, LLC LETTERHEAD]


Dynex Capital, Inc.
Attn: Thomas H. Potts
10900 Nuckols Road, 3rd Floor
Glen Allen, Virginia 23060
804-217-5861

Dynex Capital, Inc.
C/O Investment Banking Division
Paine Webber Incorporated
Attn: Mr. Jim Murray
1285 Avenue of the Americas
New York, NY 10019
212-713-2000

VIA FACSIMILE

July 12, 2000

Dear Mr. Potts and Mr. Murray:

California Investment Fund, L.L.C. is in receipt of your letter
dated July 6, 2000, and after careful review, proposes the following
revisions to the July 6 letter.

This letter of intent is intended to summarize the principal terms relating
to the proposed acquisition by California Investment Fund, L.L.C. ("Buyer")
of Dynex Capital, Inc. and its subsidiaries ("Seller"). The preliminary
understandings 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
forth 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 the Seller, the provisions of
Paragraphs 5, 6 and 13 will be binding upon Seller and Buyer.

1. Proposed value for Dynex Capital, Inc. common stock.

Buyer, or a subsidiary of Buyer (Acquisition Sub"), intends to acquire
all 11,444,188 issued and outstanding shares of common stock of Seller, for
a price of $1.8095 per share in cash, totaling $20,708,753.61. The
preferred shares will be acquired at the following prices: Class A
Preferred, 1,309,061 shares at $7.0990 per share, totaling $9,292,994.62;
the Class B Preferred 1,912,434 shares at $7.5166 per share, totaling
$14,374,933.39; and the Class C Preferred 1,840,000 shares at $8.4909 per
share, totaling $15,623,318.37. This would result in an aggregate purchase
price of $60,000,000 for the common and preferred stock of Seller. All
accrued, unpaid dividends, which is estimated to be $12,912,000 as of June
30, 2000, are included in the share prices, and no further accrual will be
paid. Dynex agrees not to pay any of these accrued dividends prior to the
closing of the proposed transaction. All unvested and vested options (none
of which are in-the-money) will be cancelled.

Separately, CIF or an affiliate will have the option to acquire
all the issued and outstanding shares of common stock of Dynex's affiliate,
Dynex Holding, Inc. at its book value of approximately $200,000.00.

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

Buyer anticipates that the transaction will be accomplished
through the merger of Acquisition Sub and Seller. Certain assets of Seller
that may not be transferred to Acquisition Sub (which is not a REIT or a
qualified REIT subsidiary) or that Buyer wishes to transfer to a REIT or a
qualified REIT subsidiary will be sold by Seller in transactions
pre-arranged by Buyer after deposit of the Purchase Price (as defined
below) in escrow and the satisfaction of all other conditions to the
proposed transaction, but prior to the completion of the proposed merger.

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

Buyer anticipates that the aggregate amount necessary to purchase
the common stock of Seller and the preferred stock of Seller (the "Purchase
Price") will be comprised of working capital of Buyer and financing from
its lender.

4. Observation Rights

Upon the execution of the definitive merger agreement, Buyer
shall be granted a right to designate one person to act as an observer (the
"Observer") at the headquarters of Seller. The Observer shall also be
entitled to notice of and to attend all meetings of the Board of Directors
of Seller, and to receive any material distributed to the directors in the
capacity as directors of Seller, but will have no voting rights or rights
to participate in any discussions of the Board of Directors of Seller.
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 proposed merger.

5. Due Diligence.

Seller shall cooperate fully with Buyer in its due diligence
investigation and will make available to Buyer and its financial and legal
advisors all books, records and business and financial information
reasonably requested by Buyer with respect to the subject matter of this
letter of intent during the Due Diligence Period. The Due Diligence Period
will expire upon the earlier of (a) fourteen (14) calendar days from the
date of this letter of intent, (b) written notification by Buyer that it is
terminating the Due Diligence Period or (c) written notification by Buyer
that it is prepared to engage in exclusive negotiations in accordance with
Paragraph 6 and that it will waive its due diligence condition ("Notice").
In addition, Seller agrees that Buyer is allowed to contact the financial
advisors, note holders and stockholders of Seller in order to satisfy the
conditions of Paragraph 6. During the Due Diligence period, Seller agrees
that CIF is allowed to contact Seller's financial advisor. In addition,
during the Due Diligence period, Seller agrees that CIF is allowed to
contact holders of Seller's senior note (the "senior Notes") and
stockholders in order to satisfy the conditions of Paragraph 7.

6. Definitive Merger Agreement; Exclusive Period.

Subject to the conditions of Paragraph 8, upon the receipt of
Notice, Buyer will be granted a fourteen (14) calendar day period (the
"Exclusive Period") in which Seller will negotiate in good faith and
exclusively with Buyer in an attempt to execute a definitive merger
agreement. During this period, Seller 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 Buyer and its affiliates) relating to any transaction
involving the sale of the business or assets of Seller or of any capital
stock of Seller, or any merger, consolidation or similar transaction
involving Seller. The parties will cooperate with each other and use their
reasonable best efforts to negotiate, prepare and execute a definitive
merger agreement during this period. During the Exclusive Period, Seller
agrees to notify promptly and to provide a copy to Buyer of any notice from
any creditor relating to either 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, among other
things, to, (i) completion of due diligence investigation satisfactory to
Buyer and its financing sources; (ii) execution of a definitive merger
agreement; (iii) the approval of the respective boards of directors of
Buyer and Seller; (iv) the approval of the stockholders of Seller; (v) the
approval of the holders of senior notes of Seller, and Buyer must negotiate
a discount of the Senior Notes acceptable to the Buyer; (vi) the receipt of
all required governmental approvals; (vii) the receipt of all materials
consents from third parties, including waivers and/or restructuring of
Buyer credit lines; (viii) Seller not increasing its debt level above the
amount reflected in its December 31, 1999 financials; (x) Seller not
changing its executive compensation by an amount greater than 10% of 1999
levels. Buyer will consider the employment of certain of Seller's key
employees, but such employment is not a condition of the closing of the
proposed transaction.

8. Right of First Refusal.

In the event that Seller receives an offer which Seller believes
to be superior to Buyer's offer during the Due Diligence Period, it shall
provide written notice to Buyer of the details of the offer. Buyer 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 Buyer
and Seller.

10. Conduct of Business.

Pending the execution of a definitive merger agreement, Seller
will conduct its 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 Seller's books
or has a loan balance in excess of $5 million shall require the
pre-approval of Buyer.

11. Deposit.

Upon the execution of this agreement, Buyer will deposit into an
escrow 572,178 shares of common stock of Seller by Buyer (the "Deposit
Shares"). In the event that Buyer breaches in any material respect its
obligations under the definitive merger agreement, Seller shall be entitled
to the Deposit Shares. This remedy is intended to be a liquidated payment
and is the sole remedy of Seller of the event of any breach by Buyer of its
obligations under the definitive merger agreement.

12. Break-up Fee.

In consideration of Buyer's incurrence of expenses, including the
significant cost of conducting its due diligence investigation, Buyer shall
be entitled to a break-up fee after the execution of the definitive merger
agreement if one of the following occurs: (i) the Board of Directors of
Seller withdraws its recommendation to the stockholders of Seller in favor
of Buyer's purchase of Seller, (ii) the Board of Directors of Seller
accepts a "superior" proposal for the purchase of Seller, or (iii) Seller
is unable to obtain approval of the stockholders or the senior note holders
of Seller. The break-up fee shall be equal to the greater of $2.5 million
or 25% of the difference between the Purchase Price and the "superior"
proposal accepted by the Board of Directors of Seller.

13. Chase Bank of Texas Liability

Buyer will have the option to accept the liability for the Chase
Bank of Texas Letter of Credit facility related to the $79 million
off-balance sheet liability upon the execution of this letter agreement,
and such other mutually satisfactory agreements that are necessary for the
assumption of the liability. The liability will be assumed at its book
amount of 87.5% of the face amount. In the event that this liability is
transferred to another party, the offer price will be reduced in an amount
corresponding to the discount granted to the third party transferee.

This letter of intent will remain outstanding until 5:00 p.m. Eastern
Daylight Time on July 17, 2000, at which time it will expire unless Seller
has executed this Letter of intent. 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 Buyer and Seller;
and (iii) the sixtieth day after the execution hereof, provided, however,
that Paragraphs 5, 5 and 13 shall survive the termination of this
agreement.

California Investment Fund, L.L.C.


By: /s/ Michael R. Kelly
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Name: Michael R. Kelly
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Title: Managing Member
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Accepted and agreed to this
day of July, 2000
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