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      Response to SEC Comment Letter Dated November 3, 2005

      Via
        EDGAR
        and USPS

      December
        15, 2005

      Mr.
        Jorge
        Bonilla

      Senior
        Staff Accountant

      Division
        of Corporation Finance

      Securities
        and Exchange Commission

      Washington,
        D.C. 20549

      RE: SEC
        Comment Letter dated November 3, 2005 regarding Dynex Capital, Inc. Form
        10-K
        for Fiscal Year December 31, 2004, Form 10-Q for the Quarterly Period Ended
        March 31, 2005 and Form 10-Q for the Quarterly Period Ended June 30, 2005,
        File
        No. 0-20507

      Dear
        Mr.
        Bonilla:

      As
        requested, we are responding to the questions included in your comment letter
        to
        us dated November 3, 2005. For your reference, we have included each of your
        comments in this letter in italics followed by our response to the
        comment.

      For
        purposes of this letter, the “Company” refers to Dynex Capital, Inc. and its
        consolidated subsidiaries.

      Form
        10-K for the Fiscal Year Ended December 31, 2004

      Item
        7 - Management’s Discussion and Analysis of Financial Condition and Results of
        Operations

      Non-GAAP
        Information on Securitized Finance Receivables and Non-Recourse Securitization
        Financing

              1.

                Please
                  explain to us in sufficient details how you considered each of
                  the
                  requirements of Item 10(e) of Regulation S-K in preparing your
                  disclosure.
                  Your response should address, but not limited to, the reconciliation
                  requirements as the relate to your presentation of “Principal Balance of
                  Net Investment”, “Amortized Cost Basis of Net Investment”, “Fair Value of
                  Net Investment”, “Cash flows received in 2004, net” and the cumulative
                  $1.1 million provision for loan losses on loans in which you do
                  not retain
                  the credit risk.

      As
        the
        Company discloses in its 2004 Form 10-K, the Company has securitized homogenous
        pools of loans and debt securities by irrevocably transferring these assets
        to

      business
        trusts which it created. These securitizations were credit tranched, with
        the

      Company
        selling the investment grade bonds to third-parties while retaining the residual
        or overcollateralization tranche of the trust. These trusts did not meet
        the
        accounting requirements of a qualified special purpose entity at the time
        of
        securitization. The trust is, therefore, consolidated in the Company’s financial
        statements, and the loans and debt securities are included as securitized
        finance receivables, with the associated bonds being presented as non-recourse
        securitization financing. GAAP requires the presentation of assets and
        liabilities separately on the balance sheet, and there is no comparable GAAP
        measure to which the Company’s retained investment in the residual or
        overcollateralization tranche (which we refer to as our “Net Investment” in the
        Non-GAAP information section of the Form 10-K) can be reconciled.

      The
        purpose of the non-GAAP presentation of net investment in securitized finance
        receivables is to provide the reader of the financial statements with an
        understanding of the Company’s net retained capital investment in the trusts,
        which are the largest investments in its securitized finance receivables
        portfolio.

      Item
        10(e)(1)(i)(A) of Regulation S-K requires, with respect to financial measures
        that are not calculated and presented in accordance with GAAP, a presentation,
        with equal or greater prominence, of the most directly comparable financial
        measures calculated and presented in accordance with GAAP. The Company has
        presented the GAAP measures that relate to the non-GAAP financial measures
        identified in the Commission’s comment with equal prominence in the “Non-GAAP
        Information on Securitized Finance Receivables and Non-Recourse Securitization
        Financing” section of “Item 1. Business” of the 2004 Form 10-K (the “Non-GAAP
        Section”).

      Item
        10(e)(1)(i)(B) of Regulation S-K requires a reconciliation (by schedule or
        other
        clearly understandable method) of the differences between the non-GAAP financial
        measure disclosed with the most directly comparable financial measure or
        measures calculated and presented in accordance with GAAP identified in Item
        10(e)(1)(i)(A).

       “Principal
        Balance of Net Investment” and “Amortized Cost Basis of Net
        Investment”

      The
        first
        table on page 6 of the 2004 Form 10-K presents the Principal Balance of Net
        Investment in securitized finance receivables (derived as the netting of
        the two
        principal balance columns in that table), which represents the residual or
        overcollateralization tranche, and the Amortized Cost Basis of this net
        investment, both of which are non-GAAP financial measures. As the Company
        presents its investments and financings on an aggregated basis, the second
        table
        of the Non-GAAP Section (the first table on page 7 of the Form 10-K) reconciles
        the detail presented in the first table to the amounts included in the financial
        statements. The Principal Balance of Net Investment in the first table are
        reconciled to the financial statements by adding and subtracting the amounts
        noted in the second table. The amounts in the second table also agree to
        footnote disclosures in the financial statements. The Amortized Cost Basis
        of
        Net Investment in the first table is reconciled to the second table by
        subtracting allowance for loan losses and unrealized gain/loss as set forth
        in
        the second table. In future filings, in order to present the reconciliation
        of
        the Amortized Cost Basis of Net Investment in the first table more clearly,
        the
        reconciliation in the second table will include a subtotal excluding allowance
        for loan losses and unrealized gain/loss to allow the reader to more easily
        reconcile this amount.

          -
            2 -

      “Fair
        Value of Net Investment”

      The
        third
        table in the Non-GAAP Section (the second table on page 7 of the 2004 Form
        10-K)
        is a presentation of the estimated fair value of each individual investment
        presented in the first table. This table discloses to the reader the estimated
        fair value of the Company’s net investment retained in securitized finance
        receivables, including those that are securitized by loans, which are debt
        securities and are not, therefore, marked to market in the financial statements
        in accordance with GAAP. Differences between the Fair Value of Net Investment,
        which is a non-GAAP financial measure, and the asset and liability balances
        shown on the face of the financial statements and in the first two tables
        represents differences in the Company’s carrying value of these investments and
        their estimated fair values. Assumptions used to estimate market value are
        included in the table, and information on the Net Cash Flows Received in
        2004,
        Net on the retained net investment from the securitization trusts for a
        particular period is presented for informational purposes as a demonstration
        of
        reasonableness of the overall fair values presented.

      “Cumulative
        $1.1 Million Provision for Loan Losses”

      The
        Cumulative $1.1 million Provision for Loan Losses referred to in the 2004
        Form
        10-K is solely a component of the GAAP provision for loan losses in the
        Statement of Operations and represents the amount by which the Company has
        reserved for estimated losses on loans in excess of its retained credit risk,
        which results from providing for estimated losses on loans that are financed
        with non-recourse bonds, where a portion of such losses will ultimately be
        borne
        by the holders of certain of the non-recourse bonds. This amount is included
        in
        the Company’s allowance for loan losses. The provision of this $1.1 million is
        required by GAAP as a result of accounting for securitized finance receivables
        discretely from the associated securitization financing. Though the Company’s
        risk is limited from an economic point of view, GAAP requires the Company
        to
        continue to record an allowance for loan losses. The Company, through its
        subsidiary MERIT Securities Corporation, reviewed its accounting for this
        matter
        with Mr. Mark Northan of the Commission in connection with the preparation
        of
        its 2004 Form 10-K, and the Commission indicated that it did not object to
        the
        Company’s accounting for this matter.

      Items
        10(e)(1)(i)(C) and 10(e)(1)(i)(D) of Regulation S-K require statements
        disclosing the reasons why the non-GAAP financial measures provide useful
        information to investors and any additional purposes for management’s use of
        non-GAAP measures. The Company believes that the reasons for presentation
        of
        non-GAAP financial measures are fully explained in the first paragraph of
        the
        non-GAAP disclosure section. There are no other material uses to the Company’s
        management of non-GAAP financial measures other than those outlined in the
        first
        paragraph.

          -
            3 -

      Items
        10(e)(1)(ii)(A) through (E) identify prohibited treatments and presentations
        of
        non-GAAP information. The Company confirms that no charges or liabilities
        pertaining to securitized finance receivables or the corresponding
        securitization financing that require cash settlement have been excluded
        from
        the non-GAAP information presented [Item 10(e)(1)(ii)(A)]. In addition, the
        non-GAAP information has not been adjusted to eliminate or smooth any
        non-recurring, infrequent or unusual items [Item 10(e)(1)(ii)(B)]. Non-GAAP
        information also is not presented on the face of the financial statements
        [Item
        10(e)(1)(ii)(C)], and titles and descriptions of this information are distinct
        from the titles and descriptions used to report GAAP financial measures [Item
        10(e)(1)(ii)(E)]. Finally, the Company has not presented any pro forma financial
        information required by Article 11 of Regulation S-X [Item
        10(e)(1)(ii)(D)].

      Financial
        Statements

      Report
        of Independent Registered Public Accounting Firm

              2.

                Please
                  confirm to us that you have a signed audit opinion and that you
                  will
                  include a conforming signature in future
                  filings.

      The
        Company has a signed audit opinion and will include a conforming signature
        in
        its future filings.

      Note
        1
        Basis of Presentation

      3.
        Please explain to us the purpose of the disclosure in the third paragraph
        that
        refer to “normal recurring accruals” and “condensed” consolidated financial
        statements.

      The
        disclosure in the third paragraph, which contains the terms referenced in
        your
        comment, was inadvertently included in the 2004 Form 10-K and is properly
        reserved for the Company’s Quarterly Reports on Form 10-Q. The statement will be
        properly excluded from future Annual Reports on Form 10-K.

      Note
        13 - Preferred and Common Stock.

      4. We
        note that you completed a recapitalization of your preferred stock in 2004.
        Please reconcile this footnote to your consolidated statements of shareholders’
equity, operations and cash flows and explain to us how you accounted for
        this
        transaction. Tell us how you applied EITF D-42 and EITF D-53 and any other
        relevant accounting literature that you used to support your accounting.
        Also,
        clarify whether the redemption of the preferred stock is solely at your
        option.

      The
        Company accounted for the recapitalization in accordance with the guidance
        provided in Emerging Issues Task Force (EITF) topic no. D-42, “The Effect on the
        Calculation of Earnings Per Share for the Redemption or Induced Conversion
        of
        Preferred Stock.” EITF D-42 provides that “the excess of the fair value of the
        consideration transferred to the holders of the preferred stock over the
        carrying amount of the preferred stock in the registrant’s balance sheet
        represents a return to the preferred stockholder and, therefore, should be
        treated in a manner similar to the treatment of dividends paid to the holders
        of
        the preferred stock in the calculation of earnings per share.” In accordance
        with EITF D-42, the Company removed the Series A, Series B and

          -
            4 -

      Series
        C
        preferred stock from its balance sheet and recorded the Series D preferred
        stock, common stock and senior notes that were transferred as consideration
        for
        the redemption of the Series A, Series B and Series C preferred stock. The
        fair
        value of the consideration transferred was less than the liquidation preference
        of the preferred stock that was exchanged (i.e., the issue price of the
        preferred stock plus cumulative, unpaid dividends). This difference was,
        therefore, recorded as a preferred stock benefit in the Statement of
        Operations.

      EITF
        D-53, “Computation of Earnings Per Share for a Period That Includes a Redemption
        or an Induced Conversion of a Portion of a Class of Preferred Stock,” provides
        guidance on the computation and reporting of earnings per share for a period
        that includes a redemption or induced conversion of only a portion of a class
        of
        preferred stock. Because the recapitalization completed on May 19, 2004 provided
        for the redemption of all of the outstanding shares of the Series A, Series
        B
        and Series C preferred stock and required the approval of more than two-thirds
        of the outstanding shares of each class being redeemed, EITF D-53 and the
        guidance that it provides are not applicable to this transaction.

      The
        table
        in Note 13 presents the number of shares of common stock and each series
        of
        preferred stock and agrees to the number of shares presented for each respective
        class of stock in the consolidated balance sheets. The dividends on preferred
        stock presented in the third paragraph of Note 13 agrees directly to the
        consolidated statements of shareholders’ equity. The dividends-in-arrears, also
        reported in the third paragraph of Note 13, is a component of the liquidation
        preference reported in the consolidated balance sheets by each series of
        preferred stock.

      The
        Series D preferred stock, which was issued as part of th