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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K

(Mark One)

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-9819

RESOURCE MORTGAGE CAPITAL, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA 52-1549373
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)

4880 COX ROAD, GLEN ALLEN, VIRGINIA 23060
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (804) 967-5800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Title of each class Name of each exchange on which registered

Series A 9.75% Cumulative National Association of Securities Dealers
Convertible Preferred Stock, Automated
$.01 par value Quotation National Market System
Series B 9.55% Cumulative
Convertible Preferred National Association of Securities Dealers
Stock, Automated
$.01 par value Quotation National Market System

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No___

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

As of January 31, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $419,910,695 (19,530,730
shares at a closing price on The New York Stock Exchange of $21 1/2 ). Common
stock outstanding as of January 31, 1996 was 20,297,926 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days from December 31, 1995, are incorporated by reference into
Part III.






RESOURCE MORTGAGE CAPITAL, INC.
1995 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS............................................. 3

Item 2. PROPERTIES.......................................... 13

Item 3. LEGAL PROCEEDINGS................................... 13

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 13

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS..................... 13

Item 6. SELECTED FINANCIAL DATA............................. 14

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....... 15


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 22

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. 22

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.. 23

Item 11. EXECUTIVE COMPENSATION.............................. 23

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................... 23

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 23

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.............................. 23




ITEM 1. BUSINESS

GENERAL

Resource Mortgage Capital, Inc. (the Company), incorporated in Virginia in 1987,
is a self-managed real estate investment trust (REIT) that originates, services
and securitizes residential mortgage loans (collectively, the mortgage
operations) and invests in a portfolio of residential mortgage loans and
securities. The Company's primary business activities include investing in a
portfolio of residential mortgage investments and operating its mortgage
operations. The Company's strategy is to use its mortgage operations to create
investments for its investment portfolio. Principal sources of earnings for the
Company are net interest income on its investment portfolio, and the interest
spread realized while the mortgage loans are being accumulated for sale or
securitization. The Company's earnings also include gain from the securitization
or sale of mortgage loans and investments.

The Company has structured its operations such that in many respects it is
similar to a finance company, but with several important differences. The
Company generally does not pay taxes on its earnings and has generally retained
substantially less credit risk than most finance companies as a result of its
securitization structures. Due to its REIT election, the Company has focused its
business activities almost exclusively on mortgage assets that qualify as
eligible REIT investments. The Company does not have direct investments in real
estate which is characteristic of traditional REITs. The Company (i) has focused
its origination activities on the "non-conforming" segment of the mortgage
market, (ii) retains the servicing on a loan when the Company has retained all
or a portion of the credit risk on the loan, and (iii) generally invests in all
or a portion of the loans that the Company originates or purchases.

On March 21, 1996, the Company's Board of Directors approved an agreement in
principle with Dominion Capital, Inc., (Dominion) to sell the Company's
single-family correspondent, wholesale, and servicing operations. Such sale is
anticipated to be consummated in the second quarter of 1996. See SIGNIFICANT
DEVELOPMENTS FOR FURTHER DISCUSSION.


MORTGAGE OPERATIONS

The Company's mortgage operations have principally consisted of (i) the purchase
or wholesale origination of single-family mortgage loans, (ii) the purchase or
origination of multi-family mortgage loans, (iii) the securitization of such
mortgage loans, and (iv) the servicing of mortgage loans where the Company has
retained all or a portion of the credit risk. In an effort to broaden the
sources of production and income, as well as to enhance shareholder value
through risk diversification, the Company expanded its product line to include
manufactured housing loans during the fourth quarter of 1995.


SINGLE-FAMILY MORTGAGE ACTIVITIES

The Company has concentrated its single-family mortgage activities in the
"non-conforming" segment of the residential loan market, in contrast to
"conforming" segment. Non-conforming mortgage loans do not qualify for purchase
by Federal Home Loan Mortgage Association (FHLMC) or Federal National Mortgage
Association (FNMA) or for inclusion in a loan guarantee program sponsored by
Government National Mortgage Association (GNMA). Non-conforming mortgage loans
may have (i) principal balances in excess of the program limits of these
agencies, (ii) underwriting variances from agency conforming standards due to
credit history or income ratios, or (iii) documentation that does not meet
agency guidelines. Such non-conforming loans may have higher risks than
conforming mortgage loans due to their lower liquidity, different underwriting
or qualification criteria, and higher loan balances.

Single-family mortgage loans funded by the Company are secured by single
(one-to-four) family residential properties and have either fixed or adjustable
interest rates. Fixed-rate mortgage loans generally have a constant interest
rate over the life of the loan, primarily 15, 20 or 30 years. In addition,
fixed-rate mortgage loans funded by the Company may also have a fixed interest
rate for the first 3, 5, or 7 years and an interest rate which adjusts at six or
twelve month intervals thereafter, subject to periodic and lifetime interest
rate caps. Adjustable-rate mortgage (ARM) loans provide for the periodic
adjustment to the rate of interest equal to the sum of a fixed margin and an
index, generally subject to certain periodic and lifetime interest rate caps.
The Company has specifically focused on loan products with adjustable rates of
interest due to its preference for ARM securities in its investment portfolio.
In 1995, approximately 64% of the Company's purchases and originations were ARM
loans.

In 1995, the Company used two primary methods for sourcing single-family
mortgage loans including (i) a network of approved correspondents, and (ii)
approved mortgage brokers (wholesale). The loans originated or purchased by the
Company are secured by properties throughout the United States.

The correspondent network consists of purchasing closed loans from a customer
base of financial institutions such as mortgage banks, savings and loan
associations, and commercial banks. The correspondents are responsible for
closing and funding the mortgage loan in their name prior to selling the loan to
the Company. In 1995, the volume from the correspondent network was $532
million.

In 1994, the Company established its mortgage loan wholesale origination
capability in order to diversify its sources of mortgage loan production and to
compete more on service than price. By adding the wholesale origination process,
the Company became vertically integrated from origination and underwriting to
servicing and ultimate securitization. In the wholesale process, the broker
performs the marketing and sourcing functions, and the Company performs the
underwriting and closing functions. This method allows the Company to be
directly involved in the origination process of the loan, but without the direct
cost and overhead of a retail branch operation. The Company originated $338
million of loans through its wholesale network in 1995.

The Company has established its own underwriting department and underwrites 100%
of the loans it originates through the broker network and purchases from
correspondents. This allows the Company to be more responsive to its customers
and create new loan products more quickly to meet the changing needs of the
market. It also provides the Company with the ability to better manage the
credit risk of the loans as the Company's underwriting standards are followed.
The Company also has a risk management/quality control department. The functions
of this department include: (i) providing quality control on the Company's
underwriting department; (ii) reviewing and approving new correspondent sellers
and wholesale brokers; (iii) monitoring the performance of the correspondent
sellers and wholesale brokers; and (iv) focusing on resolving loan default
issues with the correspondents and pool insurers.

Through an acquisition in 1994, the Company established the capability to
service mortgage loans funded through its single-family mortgage operations.
This acquisition was part of the overall strategy of managing the Company's
exposure when all or a portion of the credit risk on a mortgage loan has been
retained subsequent to securitization. As of December 31, 1995, the Company
serviced approximately $1 billion in single-family mortgage loans, $765 million
of which the Company had retained either all or a portion of the credit risk.

MULTI-FAMILY HOUSING LENDING

In an effort to diversify its product lines outside of single-family lending,
during the third quarter of 1995 the Company re-entered the multi-family housing
lending market. Multi-family loans originated by the Company are secured by
first liens on apartment properties that have qualified for low income housing
tax credits. During 1995, the Company issued commitments aggregating $450
million to fund such loans through 1997. As with single-family mortgage lending,
the Company underwrites 100% of the multi-family loans originated. The
underwriting criteria are designed to assess the particular property's current
and future capacity to make all debt service payments on a current basis. Key
aspects of the Company's underwriting methodology include verifying and
analyzing the project's operating results; requiring minimum debt service
coverage ratios equal to or greater than 1.15 times net operating income;
structuring loan payments to focus on the build-up of equity in the project over
the 15-year tax credit compliance period; limiting the loan to value ratio to
80%; requiring a minimum of three months physical occupancy at 90% or more for
newly-constructed properties and four months for rehabilitated locations; and
requiring a $200 per annum per unit replacement reserve escrowed monthly. The
Company plans to service all its multi-family loans originated since October
1995.

The multi-family loans typically have fixed-rates of interest and generally
provide for a 15-year prepayment lockout. Since 1993, the Company has
securitized $140 million of multi-family mortgage loans through CMO or pass-
through securities.




MANUFACTURED HOUSING LENDING

As another means of diversification, the Company established a manufactured
housing lending business during the fourth quarter of 1995. Funding is expected
to commence in the second quarter of 1996. This is a large and growing market,
representing over 30% of all new single-family housing production in the United
States. These loans will be underwritten internally, primarily from credit
scoring. Most products will be fixed-rate with some adjustable-rate and
step-rate loans being introduced. Securitization of these loans will principally
occur through the issuance of collateralized mortgage obligations (CMOs) with
the Company holding a limited amount of credit risk.


The following schedule summarizes the principal balances for mortgage loans
funded through the Company's mortgage operations during the year ended December
31, 1995.


(amounts in thousands)
Single-family :
Fixed-rate:
3-year $ 36,547
10-year 219
15-year 40,401
20-year 1,153
30-year 270,746
----------
Total fixed-rate 349,066
----------
Adjustable-rate:
1-month LIBOR 23,915
3-month LIBOR 6,011
6-month LIBOR 384,723
1-year CMT 111,806
----------
Total adjustable-rate 526,455
----------
Total single-family 875,521

Multi-family:
18 to 25-year fixed-rate 18,432
----------
Total mortgage loans funded $ 893,953
==========






SALES AND SECURITIZATIONS

When a sufficient volume of mortgage loans is accumulated, the Company may elect
to sell such loans as whole loans directly to an investment banking firm or to
securitize a pool of loans through the issuance of mortgage securities in the
form of CMOs or pass-through securities. During 1995, the Company sold $114.5
million directly to investment banking firms as whole loans and securitized $1.1
billion through the issuance of securities. The Company recognizes a gain or
loss on the issuance and sale of a pass-through security, while no gain or loss
is recognized on the issuance of CMOs, as CMOs represent the issuance of a debt
security.

The securities are structured so that substantially all of the securities are
rated in one of the two highest rating categories (i.e. AA or AAA) by at least
one of the nationally recognized rating agencies. Credit enhancement for these
securities may take the form of overcollateralization, subordination, reserve
funds, mortgage pool insurance, bond insurance, or any combination of the
foregoing. The Company strives to use the most cost effective security structure
and form of credit enhancement available at the time of securitization. The
securities issued by the Company are not generally guaranteed by the federal
agencies. Each series of securities is expected to be fully payable from the
collateral pledged to secure the series. It is expected that the recourse of
investors in the series generally will be limited to the collateral underlying
the securities. Except in the case of a breach of the standard representations
and warranties made by the Company when loans are sold or securitized, the
securities are non-recourse to the Company.

Credit Enhancement

As mentioned above, credit enhancement for these securities may take the form of
overcollateralization, subordination, reserve funds, pool insurance, bond
insurance, or any combination of the foregoing. Regardless of the form of credit
enhancement, the Company may retain a limited portion of the direct credit risk
after securitization, including the risk of loss related to hazards not covered
under standard hazard insurance policies. Such credit loss exposure is generally
limited to an amount equal to a fixed percentage of the principal balance of the
pool of mortgage loans at the time of securitization. Additionally, the Company
may be contingently exposed to losses due to fraud during the origination of a
mortgage loan if the originator of such mortgage loan, if other than the
Company, defaults on its repurchase obligation.

Overcollateralization is generally used in conjunction with bond insurance in
the issuance of CMOs. Losses are first applied to the overcollateralization
amount, and any losses in addition to that amount would be borne by the bond
insurer or holders of the CMOs. The Company generally receives an excess yield
on the mortgage loans relative to the yield on the CMOs to compensate the
Company for retaining such loss exposure. At December 31, 1995, the Company
retained $42.0 million in principal amount of overcollateralization for $734
million of Collateral for CMOs issued during 1995. The reserves established as
of December 31, 1995 for such exposure total $1.8 million.

Pass-through securities generally use subordination structures as its form of
credit enhancement. Pass-through securities may also utilize a combination of
subordination, reserve funds, pool insurance or bond insurance. The credit risk
of subordinated pass-through securities is concentrated in the subordinated
classes (which may partially be credit enhanced with reserve funds or pool
insurance) of the securities, thus allowing the senior classes of the securities
to receive the higher credit ratings. To the extent credit losses are greater
than expected (or exceed the protection provided by any reserve funds or pool
insurance), the holders of the subordinated securities will experience a lower
yield (which may be negative) than expected on their investments.

As mentioned above, the Company may use mortgage pool insurance and reserve
funds for credit enhancement. Mortgage pool insurance is currently less
available as a form of credit enhancement than it had been in the past. Credit
losses covered by the pool insurance policies are borne by the pool insurers to
the limits of their policies and by the security holders if losses exceed those
limits. To the extent a loan is to be covered by mortgage pool insurance, the
Company may rely upon the credit review and analysis of each loan, which is
performed by the mortgage insurer, in deciding to fund the mortgage loan. After
these loans are securitized, the Company has only limited exposure to losses not
covered by pool insurance, resulting primarily from special hazard risks and
fraud during the origination of a mortgage loan. The Company has established
discounts and reserve funds to cover risks not covered by the pool insurance
policies, or to cover credit risks on loans not covered by pool insurance. These
discounts and reserves totaled $3.6 million and $6.2 million, respectively at
December 31, 1995.

The following table summarizes the mortgage loan delinquency information as a
percentage of the total portfolio balance at December 31, 1995 for those CMOs
issued where the Company has retained a portion of the credit risk.


(dollar amounts in thousands)

December 31, 1995
-----------------------------------
Number Dollar
of loans amount Percent
----------- ---------- ---------
Collateral principal balance 4,673 $ 700,125 100%
----------- ---------- ---------
Delinquent Loans
60 to 89 days delinquent 87 14,846 2.12
90 days and over delinquent (includes
REO and foreclosures) 152 28,649 4.09

=========== ========== ========
Total 239 $ 43,495 6.21%
=========== ========== ========


Master Servicing

The Company performs the function of master servicer for certain of the
securities it has issued. The master servicer's function typically includes
collecting loan payments from servicers of loans and remitting loan payments,
less master servicing fees receivable and other fees, to a trustee or other
purchaser for each series of securities. Master servicing responsibilities also
include monitoring the servicers' compliance with its servicing guidelines and
performing, or contracting with a third party to perform, all obligations not
adequately performed by any servicer. A master servicer typically employs
servicers to carry out servicing functions. Servicers typically perform
servicing functions for the master servicer as independent contractors. As
master servicer, the Company is paid a monthly fee based on the outstanding
principal balance of each such loan master serviced or serviced by the Company
as of the last day of each month. The Company has been master servicing mortgage
loans since November 1993.


MORTGAGE INVESTMENT PORTFOLIO

Strategy

The Company's investment strategy is to create a diversified portfolio of
securities that in the aggregate generates stable income for the Company in a
variety of interest rate environments and preserves the capital base of the
Company. The Company has created the majority of the investments for its
portfolio by retaining a portion of the securities that are generated from its
mortgage operations. The Company expects to continue to create investments from
its mortgage operations. To the extent the Company retains a portion of the
credit risk on securities in the portfolio, the Company generally will retain
the servicing of the underlying mortgage loans to better manage this risk.

Composition

Included in the Company's portfolio of mortgage investments are ARM securities,
collateral for CMOs, fixed-rate securities, and other mortgage securities. The
majority of the Company's portfolio is comprised of investments in ARM
securities. The Company increases the return on these investments by pledging
the ARM securities as collateral for repurchase agreements. The interest rates
on the majority of the Company's ARM securities reset every six months, and the
rates are subject to both periodic and lifetime limitations ("caps"). Generally,
the repurchase agreements have terms that range from 30 to 90 days, and the
interest rates are not subject to the periodic and lifetime limitations. Thus,
the yield on the ARM investments could decline if the spread between the yield
on the ARM security versus the interest rate on the repurchase agreement was to
be reduced. To partially mitigate this risk, the Company has (i) entered into a
series of interest rate swap agreements which effectively caps the increase in
repurchase agreement costs in any six-month period to 1%, and (ii) purchased
interest rate cap agreements to reduce the risk of the lifetime interest rate
limitation on the ARM securities. For these interest rate swap and cap
agreements, the Company receives additional cash flow should the related index
increase above the contracted rates on the agreements. At December 31, 1995, the
Company had interest rate swap agreements with a notional amount of $1.02
billion and interest rate cap agreements with a notional amount of $1.6 billion.

A growing segment of the Company's portfolio consists of collateral for CMOs.
The net margin on CMOs is derived primarily from the difference between the cash
flow generated from the CMO collateral, and the amounts required for interest
payments on the CMOs and administrative expenses. The CMOs are substantially
non-recourse to the Company. The Company's yield on its investment in CMOs is
affected primarily by changes in prepayment rates; such yield will decline with
an increase in prepayment rates, and the yield will increase with a decrease in
prepayment rates. During 1995, the Company issued three CMOs where
overcollateralization was used in conjunction with bond insurance as the form of
credit enhancement. Such overcollateralization, which ranges from 4%-7% of the
initial CMO balance, is retained by the Company upon securitization. Credit
losses are first applied to the overcollateralization, with any losses in excess
of that amount borne by the insurers or holders of the CMOs. The Company expects
that credit losses over the life of the CMOs will not exceed 2%-3.5% of the
initial CMO balance. To the extent that credit losses actually exceed the
expected amounts, the Company's return on its CMO investments may be diminished.

The Company's portfolio also contains fixed-rate mortgage securities which
consist of securities that have a fixed-rate of interest for specified periods
of time. Certain fixed-rate mortgage securities have a fixed interest rate for
the first 3, 5, or 7 years and an interest rate that adjusts at six or twelve
month intervals thereafter, subject to periodic and lifetime interest rate caps.
The Company's yields on these securities are primarily affected by changes in
prepayment rates; such yield will decline with an increase in prepayment rates,
and the yield will increase with a decrease in prepayment rates. The Company
generally borrows against its fixed-rate mortgage securities, through the use of
repurchase agreements. The spread between the interest rate on a repurchase
agreement and the interest rate on any fixed-rate security that the Company
plans to hold is generally fixed by using an interest rate swap. A portion of
fixed-rate mortgage securities in the Company's portfolio may be financed by
short-term repurchase agreements on a temporary basis as the Company obtains
long-term financing or elects to sell the securities. As a result, the yield on
these investments could decline if the spread between the yield on the
fixed-rate mortgage securities and the interest rate on the repurchase
agreements were to be reduced during this time period.

Other securities in the Company's portfolio consist of interest-only securities
(I/Os), principal-only securities (P/Os) and residual interests which were
either purchased or created through the Company's mortgage operations. An I/O is
a class of a CMO or a mortgage pass-through security that pays to the holder
substantially all interest. A P/O is a class of a CMO or a mortgage pass-through
security that pays to the holder substantially all principal. Residual interests
represent the excess cash flows on a pool of collateral after payment of
principal, interest, and expenses of the related mortgage-backed security or
repurchase arrangement. Residual interests may have little or no principal
amount and may not receive scheduled interest payments. The Company may borrow
against its other mortgage securities for working capital purposes. The yields
on these securities are affected primarily by changes in prepayment rates, and
to a lesser extent, by changes in short-term interest rates.

The Company continuously monitors the aggregate projected yield of its
investment portfolio under various interest rate environments. While certain
investments may perform poorly in an increasing interest rate environment,
certain investments may perform well, and others may not be impacted at all.
Generally, the Company adds investments to its portfolio which are designed to
increase the diversification and reduce the variability of the yield produced by
the portfolio in different interest rate environments. The Company may add new
types of mortgage investments to its portfolio in the future.

Risks

The Company is exposed to three types of risks inherent in investing in a
portfolio of mortgage securities. These risks include credit risk (inherent in
the mortgage security structure), prepayment/interest rate risk (inherent in the
underlying mortgage loan), and margin call risk (inherent in the mortgage
security if it is used as collateral for borrowings). Credit risk and methods
used by the Company to manage it were previously addressed in the Sales and
Securitizations section above. For prepayment/interest rate risk and margin call
risk, the Company has developed several analytical tools and risk management
strategies to monitor and address these risks, including (i) weekly
mark-to-market of a representative basket of securities within the portfolio,
(ii) monthly analysis using advanced option-adjusted spread (OAS) methodology to
calculate the expected change in the market value of various representative
securities within the portfolio under various extreme scenarios, and (iii)
monthly static cash flow and yield projections under 49 different scenarios.
Such tools allow the Company to continually monitor and evaluate its exposure to
these risks and to restructure or otherwise change the risk profile of the
investment portfolio in response to changes in the risk profile.

The Company also views its hedging activities as a tool to manage these
identified risks. For the risks associated with the periodic and lifetime
interest rate caps on the ARM securities, the Company uses interest rate cap and
interest rate swap agreements. The purpose of these transactions is to protect
the Company in the event that interest rates increase to levels higher than the
periodic and/or lifetime caps on the index on the underlying ARM loans. The caps
effectively lift the lifetime cap on a portion of the ARM securities in the
Company's portfolio while the various interest rate swap agreements limit the
Company's exposure to changes in the financing rates on a portion of these
securities.

Eurodollar financial futures and options contracts are utilized to hedge the
risks associated with financing the securities portfolio with variable rate
repurchase agreements. These instruments lengthen the duration of the repurchase
agreement financing, typically from one month to three and six months. The
Company will receive additional cash flow if the related Eurodollar index
increases above the contracted rates. If, however, the Eurodollar index
decreases below contracted rates, the Company will pay additional cash flow. As
of December 31, 1995, the Company had lengthened the duration of $2.3 billion of
its repurchase agreements to three months and $0.9 billion to six months by
entering into such futures and option contracts.

As the Company uses reverse repurchase agreements to finance a portion of its
ARM investment portfolio, the Company is exposed to margin calls if the market
value of the securities pledged as collateral for the repurchase agreements
decline. The Company has established equity requirements for each type of
investment to take into account the price volatility and liquidity of each such
investment. The Company models and plans for the margin call risk related to its
repurchase borrowings through the use of its OAS model to calculate the
projected change in market value of its investments that are pledged as
collateral for repurchase borrowings under various adverse scenarios.

As of December 31, 1995, the Company had the following repurchase agreements
outstanding:


(dollars in Millions)
Repurchase agreements secured by:
ARM Securities $1,951.5
Fixed-rate Mortgage Securities 24.2
Other Mortgage Securities 7.7
=============
Total $1,983.4
=============



During 1995, the Company structured the majority of its ARM loan securitizations
as CMOs, with the financing in effect incorporated into the bond structure. This
structure eliminates the need for repurchase agreements, consequently
eliminating the margin call risk and to a lesser degree the interest rate risk.
During 1995, the Company issued approximately $700 million in CMOs primarily
collateralized by ARM loans. The Company plans to continue to use CMOs as its
primary securitization vehicle.



FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The Company and its qualified REIT subsidiaries (collectively "Resource REIT")
believes it has complied, and intends to comply in the future, with the
requirements for qualification as a REIT under the Internal Revenue Code (the
"Code"). To the extent that Resource REIT qualifies as a REIT for federal income
tax purposes, it generally will not be subject to federal income tax on the
amount of its income or gain that is distributed to shareholders. However,
various subsidiaries of the Company, which conduct the mortgage operations and
are included in the Company's consolidated financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"), are not
qualified REIT subsidiaries. Consequently, all of the nonqualified REIT
subsidiaries' taxable income is subject to federal and state income taxes.

The REIT rules generally require that a REIT invest primarily in real
estate-related assets, its activities be passive rather than active, and it
distribute annually to its shareholders a high percentage of its taxable income.
The Company could be subject to a number of taxes if it failed to satisfy those
rules or if it acquired certain types of income-producing real property through
foreclosure. Although no complete assurances can be given, Resource REIT does
not expect that it will be subject to material amounts of such taxes.

Resource REIT's failure to satisfy certain Code requirements could cause the
Company to lose its status as a REIT. If Resource REIT failed to qualify as a
REIT for any taxable year, it would be subject to federal income tax (including
any applicable minimum tax) at regular corporate rates and would not receive
deductions for dividends paid to shareholders. As a result, the amount of
after-tax earnings available for distribution to shareholders would decrease
substantially. While the Board of Directors intends to cause Resource REIT to
operate in a manner that will enable it to qualify as a REIT in all future
taxable years, there can be no certainty that such intention will be realized.

QUALIFICATION OF THE COMPANY AS A REIT

Qualification as a REIT requires that Resource REIT satisfy a variety of tests
relating to its income, assets, distributions and ownership. The significant
tests are summarized below.

Sources of Income

To qualify as a REIT in any taxable year, Resource REIT must satisfy three
distinct tests with respect to the sources of its income: the "75% income test,"
the "95% income test," and the "30% income test." The 75% income test requires
that Resource REIT derive at least 75% of its gross income (excluding gross
income from prohibited transactions) from certain real estate related sources.

In order to satisfy the 95% income test, at least an additional 20% of Resource
REIT's gross income for the taxable year must consist either of income that
qualifies under the 75% income test or certain other types of passive income.

The 30% income test, unlike the other income tests, prescribes a ceiling for
certain types of income. A REIT may not derive more than 30% of its gross income
from the sale or other disposition of (i) stock or securities held for less than
one year, (ii) dealer property that is not foreclosure property, or (iii)
certain real estate property held for less than four years.

If Resource REIT fails to meet either the 75% income test or the 95% income
test, or both, in a taxable year, it might nonetheless continue to qualify as a
REIT, if its failure was due to reasonable cause and not willful neglect, and
the nature and amounts of its items of gross income were properly disclosed to
the Internal Revenue Service. However, in such a case Resource REIT would be
required to pay a tax equal to 100% of any excess non-qualifying income. No
analogous relief is available to REITs that fail to satisfy the 30% income test.

Nature and Diversification of Assets

At the end of each calendar quarter, three asset tests must be met by Resource
REIT. Under the "75% asset test," at least 75% of the value of Resource REIT's
total assets must represent cash or cash items (including receivables),
government securities or real estate assets. Under the "10% asset test",
Resource REIT may not own more than 10% of the outstanding voting securities of
any single non-governmental issuer, if such securities do not qualify under the
75% asset test. Under the "5% asset test," ownership of any stocks or securities
that do not qualify under the 75% asset test must be limited, in respect of any
single non-governmental issuer, to an amount not greater than 5% of the value of
the total assets of Resource REIT.

If Resource REIT inadvertently fails to satisfy one or more of the asset tests
at the end of a calendar quarter, such failure would not cause it to lose its
REIT status, provided that (i) it satisfied all of the asset tests at the close
of a preceding calendar quarter, and (ii) the discrepancy between the values of
Resource REIT's assets and the standards imposed by the asset tests either did
not exist immediately after the acquisition of any particular asset or was not
wholly or partially caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence was not satisfied, Resource REIT still
could avoid disqualification by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which it arose.

Distributions

With respect to each taxable year, in order to maintain its REIT status,
Resource REIT generally must distribute to its shareholders an amount at least
equal to 95% of the sum of its "REIT taxable income" (determined without regard
to the deduction for dividends paid and by excluding any net capital gain) and
any after-tax net income from certain types of foreclosure property minus any
"excess noncash income." The Internal Revenue Code provides that distributions
relating to a particular year may be made early in the following year, in
certain circumstances. The Company will balance the benefit to the shareholders
of making these distributions and maintaining REIT status against their impact
on the liquidity of the Company. In an unlikely situation, it may benefit the
shareholders if the Company retained cash to preserve liquidity and thereby lose
REIT status.

For federal income tax purposes, Resource REIT is required to recognize income
on an accrual basis and to make distributions to its shareholders when income is
recognized. Accordingly, it is possible that income could be recognized and
distributions required to be made in advance of the actual receipt of such funds
by Resource REIT. The nature of Resource REIT's investments is such that it
expects to have sufficient cash to meet any federal income tax distribution
requirements.

TAXATION OF DISTRIBUTIONS BY THE COMPANY

Assuming that Resource REIT maintains its status as a REIT, any distributions
that are properly designated as "capital gain dividends" generally will be taxed
to shareholders as long-term capital gains, regardless of how long a shareholder
has owned his shares. Any other distributions out of Resource REIT's current or
accumulated earnings and profits will be dividends taxable as ordinary income.
Shareholders will not be entitled to dividends-received deductions with respect
to any dividends paid by Resource REIT. Distributions in excess of Resource
REIT's current or accumulated earnings and profits will be treated as tax-free
returns of capital, to the extent of the shareholder's basis in his shares, and
as gain from the disposition of shares, to the extent they exceed such basis.
Shareholders may not include on their own tax returns any of Resource REIT
ordinary or capital losses. Distributions to shareholders attributable to
"excess inclusion income" of Resource REIT will be characterized as excess
inclusion income in the hands of the shareholders. Excess inclusion income can
arise from Resource REIT's holdings of residual interests in real estate
mortgage investment conduits and in certain other types of mortgage-backed
security structures created after 1991. Excess inclusion income constitutes
unrelated business taxable income ("UBTI") for tax-exempt entities (including
employee benefit plans and individual retirement accounts), and it may not be
offset by current deductions or net operating loss carryovers. In the unlikely
event that the Company's excess inclusion income is greater than its taxable
income, the Company's distribution would be based on the Company's excess
inclusion income. In 1995 the Company's excess inclusion income was
approximately 31.46% of its taxable income. Although Resource REIT itself would
be subject to a tax on any excess inclusion income that would be allocable to a
"disqualified organization" holding its shares, Resource REIT's by-laws provide
that disqualified organizations are ineligible to hold Resource REIT's shares.

Dividends paid by Resource REIT to organizations that generally are exempt from
federal income tax under Section 501(a) of the Code should not be taxable to
them as UBTI except to the extent that (i) purchase of shares of Resource REIT
was financed by "acquisition indebtedness" or (ii) such dividends constitute
excess inclusion income.

TAXABLE INCOME

Resource REIT uses the calendar year for both tax and financial reporting
purposes. However, there may be differences between taxable income and income
computed in accordance with GAAP. These differences primarily arise from timing
differences in the recognition of revenue and expense for tax and GAAP purposes.
Additionally, Resource REIT's taxable income does not include the taxable income
of its taxable affiliate, although the affiliate is included in the Company's
GAAP consolidated financial statements. For the year ended December 31, 1995,
Resource REIT's estimated taxable income was approximately $37.8 million.




A portion of the dividends paid during 1995 was allocated to satisfy 1994
distribution requirements and a portion of the dividends paid in 1996 will be
allocated to satisfy 1995 distribution requirements. All dividends paid during
1995 represented ordinary income for federal tax purposes.

REGULATION

As an approved mortgage loan originator, the Company is subject to various
federal and state regulations. A violation of such regulations may result in the
Company losing its ability to originate mortgage loans in the respective
jurisdiction.

The rules and regulations applicable to the mortgage operations, among other
things, prohibit discrimination and establish underwriting guidelines that
include provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts. Mortgage loan acquisition
activities are subject to, among other laws, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and
the regulations promulgated thereunder that prohibit discrimination and require
the disclosure of certain basic information to mortgagors concerning credit
terms and settlement costs.

The Company is also an approved FNMA and FHLMC seller/servicer subject to the
rules and regulations of FNMA and FHLMC with respect to acquiring, processing,
selling and servicing conforming mortgage loans. The Company is required to
submit annually to FNMA and FHLMC audited financial statements.

Additionally, there are various state and local laws and regulations affecting
the mortgage operations. The mortgage operations will be licensed in those
states requiring such a license. Mortgage operations may also be subject to
applicable state usury statutes. The Company believes that it is in present
material compliance with all material rules and regulations to which it is
subject.

COMPETITION

The Company competes with a number of institutions with greater financial
resources in originating and purchasing mortgage loans through its mortgage
operations. In addition, in purchasing mortgage assets and in issuing mortgage
securities, the Company competes with investment banking firms, savings and loan
associations, banks, mortgage bankers, insurance companies and other lenders,
GNMA, FHLMC and FNMA and other entities purchasing mortgage assets, many of
which have greater financial resources than the Company. Additionally, mortgage
securities issued relative to its mortgage operations will face competition from
other investment opportunities available to prospective purchasers.

EMPLOYEES

As of December 31, 1995, the Company had 199 employees.

SIGNIFICANT DEVELOPMENTS

On March 21, 1996, the Company's Board of Directors approved an agreement in
principle with Dominion Capital, Inc. (Dominion) to sell the Company's
single-family correspondent, wholesale, and servicing operations (the
Operations). The agreement provides Dominion an exclusive right to purchase the
Operations through April 22, 1996, which may be extended under certain
circumstances. The sales price is expected to be $67 million in consideration
for the stock and assets of the Operations with a net book value of
approximately $7 million. The proposed terms of the transaction include an
initial cash payment of approximately $17 million, with the remainder of the
purchase price paid evenly over the next five years pursuant to a note
agreement.

The terms of the agreement generally prohibit the Company from originating
single-family mortgages through either correspondents or a wholesale network for
a period of five years.

The transaction is expected to close during the second quarter of 1996. The
closing of the transaction is contingent on Dominion's completion of its due
diligence, regulatory approvals, the negotiation and execution of the definitive
purchase and sale agreements, and other matters. There can be no assurance that
the transaction will be consummated.

ITEM 2. PROPERTIES

The Company's executive and administrative offices and operations offices are
both located in Glen Allen, Virginia, on properties leased by the Company. The
address is 4880 Cox Road, Glen Allen, Virginia 23060.

ITEM 3. LEGAL PROCEEDINGS

There were no material pending legal proceedings, outside the normal course of
business, to which the Company was a party or of which any of its property was
subject at December 31, 1995.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1995.


PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's common stock is traded on the New York Stock Exchange under the
trading symbol RMR. The Company's common stock was held by approximately 4,428
holders of record as of January 31, 1996. In addition, depository companies held
stock for approximately 8 beneficial owners. During the last two years, the high
and low closing stock prices and cash dividends declared on common stock were as
follows:

Cash Dividends
High Low Declared

1995

First quarter $ 17 3/4 $ 10 3/8 $ 0.36
Second quarter 20 3/4 15 0.40
Third quarter 21 1/2 16 5/8 0.44
Fourth quarter 21 5/8 18 5/8 0.48

1994

First quarter $ 30 $ 25 1/8 $ 0.52
Second quarter 27 1/2 22 1/8 0.78
Third quarter 25 3/4 20 3/8 0.78
Fourth quarter 22 3/4 9 1/2 0.68







ITEM 6. SELECTED FINANCIAL DATA
(amounts in thousands except share data)