March 29, 2000

Guaranty Federal Bank, F.S.B.
8333 Douglas Avenue
Dallas, Texas 75225

     Re:  Modification of an existing $80,000,000.00 guidance line from Guaranty
          Federal  Bank,  F.S.B.  ("Lender") to  Legacy/Monterey  Homes L.P., an
          Arizona  corporation  ("Borrower");  such loan and other  indebtedness
          being  guaranteed  by Meritage  Corporation,  a Maryland  corporation,
          MTH-Texas GP, Inc., an Arizona  corporation and MTH-Texas LP, Inc., an
          Arizona corporation (collectively referred to as "Guarantor").

Gentlemen:

     Reference is made to that certain Master Loan Agreement dated as of January
31, 1993 (and all amendments  thereto,  if any) (the "Loan  Agreement")  between
Lender and Borrower governing a $80,000,000.00  loan (as increased) (the "Loan")
for the acquisition  and/or  refinancing of residential  lots located in certain
counties in the State of Texas as described  therein,  and the  construction  of
single-family  residences  thereon.  Unless otherwise  expressly defined herein,
each term used herein with its initial letter capitalized shall have the meaning
given to such term in the Loan Agreement. As used in this letter agreement,  the
term "Loan  Instruments"  shall mean and include (i) the "Loan  Instruments"  as
defined in the Loan Agreement, (ii) the Fifth Modification Agreement dated as of
even date herewith,  executed by and between the parties hereto,  and (iii) this
letter agreement and all other documents  executed in conjunction  herewith (and
all amendments thereto, if any).

     Borrower  and  Lender  desire to  decrease  the Loan  Amount to the  stated
principal  amount of  $65,000,000.00  and to-amend and modify  certain terms and
provisions of the Loan and the Loan Instruments as follows: .

     1.  The  Loan   Amount  is  hereby   decreased   from   $80,000,000.00   to
$65,000,000.00.  All  references  in  the  Loan  Instruments  to the  amount  of
$80,000,000.00 are hereby decreased to $65,000,000.00.

     2.  PARAGRAPH 8 of the Loan Agreement is hereby deleted in its entirety and
replaced with the following:

          8. REVOLVING LOAN. All or any portion of the principal of the Loan may
     be borrowed,  paid, prepaid,  repaid and reborrowed from time to time prior


<PAGE>
Guaranty Federal Bank, F.S.B.
March 29, 2000
Page 2


     to maturity in accordance with the provisions of the Loan Instruments.  The
     excess of  borrowing  (advances  and  re-advances)  over  repayments  shall
     evidence  the  principal  balance  of the Loan from time to time and at any
     time.  The aggregate  amount of all advances  under the Loan may exceed the
     Loan Amount, but neither the outstanding  principal balance of the Loan nor
     the outstanding  aggregate amount of the Loan Allocations shall ever exceed
     the Loan Amount. The Loan shall not be governed by or be subject to Chapter
     15 of the Texas  Credit  Code Title 79,  Revised  Civil  Statutes of Texas,
     1925, as amended.

     The maximum total Loan  Allocations and Letters of Credit under the Loan at
     any time shall be limited to  $110,000,000.00,  which sum shall  consist of
     the following:

          (a)  the  total  of all  Loan  Allocations  for  Property  secured  by
               Mortgages, plus;

          (b)  the amount of any Letters of Credit (when issued, if any);

     provided,  however, that the $110,000,000.00 Loan Allocation limitation set
     forth in this  sentence  shall be  increased by an amount equal to any cash
     deposits  made by Borrower  with  Lender as security  for the Loan and as a
     Borrower's  Deposit under PARAGRAPH 5 of the Loan Agreement (with each such
     deposit to be advanced by Lender to Borrower prior to the  disbursement  of
     loan proceeds upon the  satisfaction  of conditions for advances under this
     Loan  Agreement).  Borrower  shall  execute  and  deliver  to  Lender  such
     documents as may be necessary to establish such account and to grant Lender
     a security interest in the same.

     Notwithstanding  any provision in the Loan Instruments to the contrary,  in
     no event  shall the sum of (i) the  aggregate  amounts  advanced  under the
     Note,  and (ii) the amount of any Letters of Credit (when  issued,  if any)
     exceed a total of  $65,000,000.00,  notwithstanding  that the maximum total
     Loan  Allocations  and  Letters of Credit  under the Loan may  exceed  such
     $65,000,000.00 total; and consequently,  Lender shall have no obligation to
     disburse additional funds in the event the sum of (i) the aggregate amounts
     advanced or to be advanced (including all Loan Allocations) under the Note,
     and (ii) the amount of any Letters of Credit (when issued, if any) exceed a
     total of $65,000,000.00.

     Notwithstanding any provisions in the Loan Instruments to the contrary,  if
     at anytime the aggregate disbursed and unpaid principal balance of the Loan
     (together  with the  aggregate  amount of any  Letters of Credit  under the
     Loan) exceed  $65,000,000.00,  then Borrower shall  immediately  (following
     written  demand by Lender)  deliver to Lender a cash  amount  equal to such
     excess,  which cash amount shall be applied to the principal balance of the
     Loan  in  order   that  such   aggregate   amount   shall  be   reduced  to
     $65,000,000.00.
<PAGE>
Guaranty Federal Bank, F.S.B.
March 29, 2000
Page 3


     3.  EXHIBIT A to the Loan  Agreement  is hereby  modified by deleting  such
exhibit in its entirety and replacing it with EXHIBIT A attached hereto.

     4. All  Loan  Instruments  hereby  are  amended  and  modified  in a manner
consistent with the  modifications,  terms and/or  provisions  contained herein.
Except as modified hereby, all the terms,  provisions and conditions of the Loan
Instruments shall remain in full force and effect.

     5. This letter agreement  constitutes the "Letter Agreement" referred to in
the Fifth  Modification  Agreement of even date herewith executed by and between
the parties hereto.

     6. The terms and  provisions of this letter  agreement may not be modified,
amended,  altered or otherwise affected except by instrument in writing executed
by Lender and Borrower.

     7. Each  Guarantor  by its  execution  hereof agree to the  amendments  and
modifications  to the  Loan  Instruments  set  forth  herein  and  in the  prior
amendments and  modifications to the Loan Instruments and agree that all of such
modifications do not and will not waive, release or iii any manner modify either
Guarantor's obligations and liabilities under and pursuant to the Guaranty.

             (The balance of this page is intentionally left blank.)
<PAGE>
Guaranty Federal Bank, F.S.B.
March 29, 2000
Page 4


     If this letter  agreement  correctly  sets forth our  understanding  of the
subject matter contained  herein,  please indicate this by executing this letter
agreement in the space furnished below and then return a fully-executed  copy to
the undersigned.

                                        Very truly yours,

                                        BORROWER:

                                        LEGACY/MONTEREY HOMES L.P.,
                                        an Arizona limited partnership

                                        BY: MTH-TEXAS GP, INC.,
                                            an Arizona corporation,
                                            General Partner


                                            By: /s/ Rick Morgan
                                                --------------------------------
                                                Name: Rick Morgan
                                                Title: Vice President
<PAGE>
Guaranty Federal Bank, F.S.B.
March 29, 2000
Page 5


                                        GUARANTOR:

                                        MERITAGE CORPORATION,
                                        a Maryland corporation


                                        By: /s/ John R. Landon
                                            ------------------------------------
                                            Name: John R. Landon
                                            Title: CO-CEO


                                        MTH-TEXAS GP, INC.,
                                        an Arizona corporation,


                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President


                                        MTH-TEXAS LP, Inc.,
                                        an Arizona corporation


                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President
<PAGE>
Guaranty Federal Bank, F.S.B.
March 29, 2000
Page 6


ACCEPTED AND AGREED TO:

LENDER:

GUARANTY FEDERAL BANK, F.S.B.,
a federal savings bank

By: /s/ Sam A. Meade
    -------------------------------
    Name: Sam A. Meade
    Title: Senior Vice President
<PAGE>
                                    EXHIBIT A

                                TO LOAN AGREEMENT

1.   Introductory  Paragraph.  RESIDENCE AND INVENTORY LOT  LIMITATIONS.  At any
     given time,  Residences and Inventory Lots financed under the Loan shall be
     limited to the following numbers, unless modified by Lender in writing:

     Total Residences:  Seven Hundred Seventy-five (775).
     Specs:             One Hundred Twelve (112).
     Models:            Sixty-three (63).
     Inventory Lots:    One Thousand One Hundred Twenty-five (1,125).

     Borrower may increase the number of Specs  allowed above by the same number
     by which Borrower is short of Models allowed above.  Borrower covenants and
     agrees not to allow,  and is prohibited  from  allowing,  any more than ten
     (10) Specs,  three (3) Models or one hundred fifty (150)  Inventory Lots to
     exist in any Approved Subdivision (as hereinafter defined).

     The outstanding  aggregate amount of the Loan Allocations for all Specs and
     Models at any time shall never exceed $16,800,000.00.

     The outstanding  aggregate amount of the Loan Allocations for all Inventory
     Lots at any time shall never exceed $18,000,000.00.

     The term  "SPECS"  means a Residence  which is not a Model and is not Under
     Contract.  The term "MODEL" means a Residence specifically utilized for the
     purposes  of  marketing  other  residential  products.  The  term  ".'UNDER
     CONTRACT" shall mean Residences under written contract to sell to bona fide
     third parties  unrelated to Borrower,  having no  contingency  or any other
     conditions not reasonably  susceptible  to being  satisfied,  providing for
     earnest  money  deposits of at least  $2,000.00,  and for which  Lender has
     received  preliminary loan approval from a bona fide residential  permanent
     lender.

     The term "INVENTORY RESIDENCE" means any Residence which is not a Model.

2.   Introductory Paragraph.  APPROVED SUBDIVISIONS.  The following subdivisions
     and  any  additional  subdivisions  approved  in  writing  by  Lender  (the
     "APPROVED  SUBDIVISIONS")  are  approved by Lender for the  Residences  and
     Inventory Lots:

     Subdivision                                  County
     -----------                                  ------
     Stone Canyon (Fern Bluff)                    Williamson
     Oakmont Forest                               Williamson
     Settlers Ridge/Creekside                     Travis
     Round Rock Ranch                             Williamson
     The Meadows (Thunderbird Est.)               Collin
     Brighton Estates - Arlington                 Tarrant
     Bristol Park (Fountain Creek)                Collin
     Chase-Oaks                                   Collin
     Cottonwood Bend                              Collin
     Country Club Park                            Dallas
     Creekwood Estates                            Denton
     Crestwood                                    Collin
     Cross Creek West                             Collin
     Eden Road Estates                            Tarrant
     El Dorado Heights                            Collin
     Heritage Park - Allen                        Collin
     Highland Parkway                             Collin
     Hillcrest Estates                            Collin


EXHIBIT A, - Page 1
<PAGE>
     Hunters Glen                                 Collin
     Independence Hill                            Collin
     Meadow Glen PH IIB                           Denton
     Oakwood Glen                                 Collin
     Orchard Valley Estates                       Denton
     Parkdale - Plano                             Collin
     Shadow Lakes                                 Collin
     Shadow Lakes North                           Collin
     Lakes of Valley Ranch                        Dallas
     Vista Ridge Estates                          Denton
     Windhaven Farms (Carelle Custom)             Collin
     Ravenglass Estates                           Collin
     Frankford Meadows                            Dallas
     Hunter Trail                                 Tarrant
     Fossil Beach                                 Tarrant

3.   Introductory  Paragraph.  APPROVED PRICE RANGE.  The Residences shall be in
     the $70,000.00 to $350,000.00 price range.

4.   Paragraph  1(c).  GUARANTOR.  Guarantor  of the  Loan  shall  be:  Meritage
     Corporation,  am Maryland  corporation  (formerly  known as "Monterey Homes
     Corporation");  MTH-Texas G.P., Inc., an Arizona corporation; and MTH-Texas
     L.P., Inc., an Arizona corporation.

5.   Paragraph 2(h). LOAN FINANCE CHARGE. None.

6.   Paragraph  2(k) and 6(g).  INSPECTION  FEE. An inspection fee of $30.00 per
     Residence  shall be paid to Lender on the day the  Mortgage  pertaining  to
     such Residence is recorded in the Real Property Records.

7.   Paragraph 4(c). LOAN RATIOS. With respect to Residences Under Contract, the
     Loan  Allocation  shall not exceed the  lesser of (1) one  hundred  percent
     (100%) of the direct costs of a Property,  as  determined by Lender or, (2)
     eighty  percent  (80%) of the lowest of the values as provided in PARAGRAPH
     4(C) (I) (II) AND III) of this Loan Agreement.

     With respect to Specs, Models and Inventory Lots, the Loan Allocation shall
     not exceed the lesser of (1) one hundred percent (100%) of the direct costs
     of a Property,  as determined by Lender or, (2) seventy-five  percent (75%)
     of the lowest of the values as  provided  in  PARAGRAPH  4(C) (I ,~(II) AND
     (III) of this Loan Agreement.

8.   Paragraph 6(q). OTHER ENTITIES. The Mortgages shall additionally secure all
     other  indebtedness  now or  hereafter  owed by the  following  entities to
     Lender: None.

9.   Paragraph  6(s).  REQUIRED  RELEASES.  Borrower shall cause:  (a) Inventory
     Residences to be released from a Mortgage nine (9) months from the day such
     Mortgage  is  recorded  in the Real  Property  Records,  (b)  Models  to be
     released from a Mortgage twenty-four (24) months from the day such Mortgage
     is recorded in the Real  Property  Records,  and (c)  Inventory  Lots to be
     released  from a Mortgage  twelve (12) months from the day such Mortgage is
     recorded in the Real Property  Records;  provided,  however,  if no default
     then exists under any Loan Instruments,  Lender may, at its option,  extend
     the Required  Release  Date for periods of three (3) months (the  "EXTENDED
     RELEASE DATE");  provided,  such Extended Release Date shall in no event go
     beyond the Stated  Maturity Date (as  hereinafter  defined) or the Extended
     Maturity Date (as hereinafter defined), if applicable.

10.  Paragraph 7. REQUIRED PRINCIPAL  REDUCTIONS.  Prior to the date that Lender
     gives Borrower the notice  described in PARAGRAPH 4(F) above, the following
     shall apply:  in the event a Property has been granted an Extended  Release
     Date (as provided in PARAGRAPH 9 of this EXHIBIT A) and a Mortgage  remains
     covering  such  Property  beyond the  following  periods from the date such
     Mortgage is recorded,  then Borrower shall make a principal  payment of the
     Note in an amount equal to ten percent  (10%) of the Loan  Allocation  with


EXHIBIT A, - Page 2
<PAGE>
     respect to such Property (and the Loan  Allocation  for such Property shall
     be reduced by the same amount), as determined by Lender:

     Inventory Residences:    Fifteen (15) months.
     Models:                  Twenty-four (24) months.
     Inventory Lots:          Twelve (12) months.

     From and after the date that Lender gives Borrower the notice  described in
     PARAGRAPH 4(FL of the Loan  Agreement,  the following  shall apply:  in the
     event a Property has been granted an Extended  Release Date, as provided in
     PARAGRAPH 9 of this EXHIBIT A, Borrower  shall make a principal  payment on
     the Note of ten  percent  (10%) of that  portion  of the Loan  advanced  by
     Lender for such  Property,  within the  following  periods  from the date a
     Mortgage covering such Property is recorded in the Real Property Records:

     Inventory Residences:    Fifteen (15) months.
     Models:                  Twenty-four (24) months.
     Inventory Lots:          Twelve (12) months.

11.  Paragraph 9. MATURITY AND EXTENSION. The maturity date of the Note shall be
     the later of the maturity date as provided in the Note (July 31, 2000) (the
     "STATED MATURITY DATE"), or nine (9) months after the recording in the Real
     Property  Records  of the last  Mortgage  (the  "EXTENDED  MATURITY  DATE")
     approved  by Lender  and  recorded  prior to the  expiration  of the Stated
     Maturity Date. After the Stated Maturity Date, no additional Mortgage shall
     be recorded.

12.  Paragraph  10.  ADDITIONAL  DEFAULTS.  In addition to the events of default
     stipulated in the Loan  Instruments,  it shall be a default under this Loan
     Agreement if Borrower fails to comply with any of the following: None.

13.  Paragraph 11.  ADDITIONAL LOAN COVENANTS.  Borrower shall fully perform and
     satisfy the following "ADDITIONAL LOAN COVENANTS":

     (a)  The aggregate  net worth of Borrower  (determined  in accordance  with
          generally accepted accounting principles,  consistently applied) shall
          not fall below $25,000,000.00.

     (b)  The ratio of total  liabilities  to equity (as  determined  by Lender)
          shall not exceed 3.0 to 1.0.

     (c)  John Landon shall at all times retain management control of Borrower.

     (d)  In no event shall Meritage Corporation, a Maryland corporation,  be in
          default under any secured indebtedness.

     If Borrower or Guarantor (if  applicable to Guarantor)  breaches any of the
     Additional  Loan  Covenants  then,  at  Lender's  election,  no  additional
     Mortgages  shall  be  recorded  in the  Real  Property  Records;  provided,
     however,  that a breach  of any  Additional  Loan  Covenants  shall  not be
     considered a default under the Loan Instruments.

14.  Paragraph  16(d).  RELEASE PRICE. The partial release price shall be a cash
     amount  equal to the Loan  Allocation  for the Property  multiplied  by the
     Stage  (expressed  as a percentage)  of the Property,  all as determined by
     Lender;  provided,  however, if Lender shall have given Borrower the notice
     described in PARAGRAPH 4(F) of the Loan Agreement, then the partial release
     price  shall be an  amount in cash  equal to one  hundred  and one  hundred
     percent  (100%) of the  outstanding  balance of the Loan advanced by Lender
     for the Property.

15.  Paragraph  16(e).  EXTENSION  FEE. If Lender  extends the Required  Release
     Date, as provided in PARAGRAPH 9 of this EXHIBIT A,  Borrower  shall pay to
     Lender an  extension  fee of one percent (1 %) of that  portion of the Loan
     advanced by Lender for each such Property  times a fraction,  the numerator
     of which is the number of days the  Required  Release  Date is extended and
     the denominator of which is 365.


EXHIBIT A, - Page 3
<PAGE>
                          FIFTH MODIFICATION AGREEMENT

     This FIFTH  MODIFICATION  AGREEMENT (this  "Agreement") is made and entered
into as of March 29, 2000, by and between LEGACY/MONTEREY HOMES L.P., an Arizona
limited  partnership and GUARANTY  FEDERAL BANK,  F.S.B., a federal savings bank
organized and existing under the laws of the United States ("Lender").

                                   WITNESSETH:

     WHEREAS,   pursuant  to  a  certain   Master  Loan   Agreement  (the  "LOAN
AGREEMENT':) dated as of January 31, 1993,  between Lender and Borrower,  Lender
made  a  loan  (the  "LOAN")  to  Borrower,  evidenced  by a  certain  Revolving
Promissory Note (the "NOTE") dated as of January 31, 1993,  payable to Lender in
the stated principal amount of FIFTY MILLION AND NO/100 DOLLARS ($50,000,000.00)
(as increased), with interest and principal payable as set forth therein; and

     WHEREAS,  to secure the Note and Loan,  Master Form  Deed(s) of Trust (With
Security Agreement and Assignment of Rents and Leases) (hereinafter collectively
referred to as the "MASTER DEEDS OF TRUST,"  whether one or more),  which Master
Deeds of Trust have been  recorded in certain  counties in the State of Texas as
more particularly described on EXHIBIT A attached hereto; and which Master Deeds
of Trust are  incorporated by reference  pursuant to the terms and provisions of
certain  Deeds of Trust  Incorporating  by Reference a Master Form Deed of Trust
(With  Security  Agreement  and  Assignment  of  Rents  and  Leases)  (hereafter
collectively  referred to as the  "SUPPLEMENTAL  DEEDS OF TRUST," whether one or
more) recorded in such counties and encumbering  certain real and other property
(the "Pro a ") described in such Supplemental  Deeds of Trust (such Master Deeds
of Trust and Supplemental Deeds of Trust hereafter  collectively  referred to as
the "DEEDS OF TRUST," whether one or more); and

     WHEREAS,  the  Deeds of Trust  were  modified  pursuant  to a  Modification
Agreement (the "FIRST MODIFICATION"), and recorded in various counties in Texas,
which First  Modification  modified  certain terms and provisions of the Loan as
set forth therein; and

     WHEREAS,  the Deeds of Trust were further pursuant to a Second Modification
Agreement (the "SECOND  MODIFICATION") dated as of May 19, 1998, and recorded in
various counties in Texas, which Second Modification  modified certain terms and
provisions of the Loan as set forth therein; and

     WHEREAS,  the Deeds of Trust were further pursuant to a Third  Modification
Agreement (the "THIRD  MODIFICATION")  dated as of March , 1999, and recorded in
various counties in Texas, which Third  Modification  modified certain terms and
provisions of the Loan as set forth therein; and

     WHEREAS,  the Deeds of Trust were further pursuant to a Fourth Modification
Agreement (the "FOURTH MODIFICATION") dated as of July 31, 1999, and recorded in
various counties in Texas, which Fourth Modification  modified certain terms and
provisions of the Loan as set forth therein; and

     WHEREAS,  the Note and the Loan are  guaranteed  pursuant  to that  certain
Guaranty  Agreement  dated as of June 30,  1997 (the  "GUARANTY"),  executed  by
MTH-Texas  GP, Inc.,  an Arizona  corporation,  MTH-Texas  LP, Inc.,  an Arizona
corporation, and Meritage Corporation, a Maryland corporation (formerly known as
"Monterey Homes Corporation") ("GUARANTOR," whether one or more); and


FIFTH MODIFICATION AGREEMENT - Page 1
<PAGE>
     WHEREAS, the Loan Agreement,  the Note, the First Modification,  the Second
Modification,  the Third  Modification,  the Fourth  Modification,  the Deeds of
Trust  and  all  other  documents   evidencing  and/or  securing  the  Loan  are
hereinafter collectively called the "LOAN INSTRUMENTS"; and

     WHEREAS,  Lender,  the owner and  holder of the Note and the Deeds of Trust
and all rights and titles evidenced thereby,  and Borrower,  the record owner of
the Property  and being  liable for the payment of the Note and Loan,  desire to
modify the Loan Instruments as herein provided.

     NOW,  THEREFORE,  in  consideration  of Ten and No/100 Dollars ($10.00) and
other good and valuable consideration,  the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:

     1. The Loan is hereby decreased from $80,000,000.00 to $65,000,000.00.  All
references in the Loan  Instruments to the amount of  $80,000,000.00  are hereby
decreased to $65,000,000.00.

     2. Borrower shall execute and deliver to Lender a letter agreement (in form
and  substance  satisfactory  to Lender  in its sole  discretion)  (the  "LETTER
AGREEMENT")  dated  as of the date  hereof  amending  certain  other  terms  and
provisions of the Loan  Instruments.  (Hereafter,  this Agreement and the Letter
Agreement shall be included in the defined term "LOAN INSTRUMENTS.")

     3. Borrower  acknowledges and agrees, that as an accommodation to Borrower,
EXHIBIT A hereto  (which  exhibit  describes the  recording  information  of the
Master Deeds of Trust) shall be attached to this  Agreement  (and to any and all
other  documents  which may  require  the  attachment  of a  description  of the
recording  information of the Master Deeds of Trust) after Borrower's  execution
of same.  Accordingly,  Borrower hereby  authorizes and directs Lender to attach
such EXHIBIT A to this Agreement.

     4. Notwithstanding anything to the contrary in any of the Loan Instruments,
Borrower  acknowledges and agrees,  that to the extent that Lender is relying on
Chapter 303 of the Texas  Finance  Code .to  determine  the Maximum  Lawful Rate
(hereafter  defined)  payable  on  the  Note  and/or  the  Related  Indebtedness
(hereafter  defined) Lender will utilize the weekly ceiling from time to time in
effect as provided in such Chapter 303, as amended.  To the extent United States
federal law permits Lender to contract for, charge,  take,  receive or reserve a
greater  amount of  interest  than under  Texas law,  Lender will rely on United
States  federal law instead of such  Chapter 303 for the purpose of  determining
the Maximum Lawful Rate.  Additionally to the extent permitted by applicable law
now or  hereafter  in effect,  Lender  may, at its option and from time to time,
utilize any other  method of  establishing  the  Maximum  Lawful Rate under such
Chapter 303 or under other  applicable  law by giving  notice,  if required,  to
Borrower as provided  by  applicable  law now or  hereafter  in effect.  As used
herein,  the term  "MAXIMUM  LAWFUL RATE" shall mean the maximum  lawful rate of
interest which may be contracted for,  charged,  taken,  received or reserved by
Lender  in  accordance  with the  applicable  laws of the  State  of  Texas  (or
applicable  United  States  federal law to the extent that it permits  Lender to
contract for, charge, take, receive or reserve a greater amount of interest than
under Texas law), taking into account all Charges (as hereafter defined) made in
connection  with  the  transaction  evidenced  by the Note  and the  other  Loan
Instruments.  As used herein,  the term "CHAR YES" shall mean all fees,  charges
and/or any other things of value,  if any,  contracted for,  charged,  received,
taken or reserved by Lender in connection with the transactions  relating to the
Note and the  other  Loan  Instruments,  which are  treated  as  interest  under
applicable law. As used herein, the term "RELATED  INDEBTEDNESS"  shall mean any
and all  debt  paid or  payable  by  Borrower  to  Lender  pursuant  to the Loan
Instruments  or any other  communication  or writing by or between  Borrower and
Lender related to the transaction or transactions  that are the subject mater of
the Loan  Instruments,  except  such debt  which has been paid or is  payable by
Borrower to Lender.


FIFTH MODIFICATION AGREEMENT - Page 2
<PAGE>
     5. Notwithstanding anything to the contrary contained in the Deeds of Trust
or other Loan Instruments,  with respect to any amendment to the Master Deeds of
Trust, the following terms and provisions shall apply;

     With respect to any amendment or  modification of the Master Deeds of Truth
     now or hereafter  executed by Borrower (or any future owner of the Property
     if different from Borrower) and duly recorded in the  appropriate  official
     public  records,  Borrower  acknowledges  and agrees that such amendment or
     modification of the Master Deeds of Trust shall  constitute an amendment or
     modification to the terms and provisions of any such Supplemental  Deeds of
     Trust (and shall be incorporated into any such Supplemental  Deeds of Trust
     and made a part  thereof  for all  purposes,  as though such  amendment  or
     modification  of the Master  Deeds of Trust  specifically  referred to such
     Supplemental  Deeds  of  Trust)  without  the  necessity  of  any  specific
     reference in such amendment or modification to any such Supplemental  Deeds
     of Trust;  and no such  amendment  or  modification  of the Master Deeds of
     Trust shall impair the obligations of Borrower under any such  Supplemental
     Deeds of Trust or any other of the Loan Instruments.

     6. Borrower hereby  expressly  promises to pay to the order of Lender,  the
principal  amount of the Note (as  modified and  increased)  and all accrued and
unpaid  interest now or hereafter to become due and payable under the Note,  and
Borrower hereby expressly promises to perform all of the obligations of Borrower
under the Loan Instruments (as modified and increased).

     7. The liens of the Deeds of Trust are hereby  acknowledged  by Borrower to
be good,  valid and  subsisting  liens,  and such liens are hereby  renewed  and
extended  so as to secure  the  payment  of the Note and Loan (as  modified  and
increased).

     8. Borrower  hereby  represents and warrants to Lender that (a) Borrower is
the sole legal and beneficial  owner of the Property;  (b) Borrower has the full
power and authority to make the agreements  contained in this Agreement  without
joinder  or  consent  of any  other  party;  (c)  the  execution,  delivery  and
performance  of this  Agreement will not contravene or constitute an event which
itself or which  with the  passing  of time or  giving  of notice or both  would
constitute a default under any deed of trust, loan agreement, indenture or other
agreement to which  Borrower or Guarantor is a party or by which Borrower or any
of its  property  is bound;  and (d)  there  exists  no  default  under the Loan
Instruments  (as modified).  BORROWER HEREBY AGREES TO INDEMNIFY AND HOLD LENDER
HARMLESS  AGAINST  ANY LOSS,  CLAIM,  DAMAGE,  LIABILITY  OR EXPENSE  (INCLUDING
WITHOUT LIMITATION,  ATTORNEYS' FEES) INCURRED AS A RESULT OF ANY REPRESENTATION
OR  WARRANTY  MADE BY  BORROWER  HEREIN  PROVING  TO BE UNTRUE  IN ANY  MATERIAL
RESPECT.

     9. The terms and conditions hereof may not be modified, amended, altered or
otherwise  affected  except by  instrument  in  writing  executed  by Lender and
Borrower.

     10.  All Loan  Instruments  are hereby  amended  and  modified  in a manner
consistent with the  modifications,  terms and/or  provisions  contained herein.
Except as  expressly  modified  hereby,  the terms  and  conditions  of the Loan
Instruments are and shall remain in full force and effect.

     11. Borrower agrees to pay to Lender,  contemporaneously with the execution
and delivery  hereof,  all costs and expenses  incurred in connection  with this
transaction,  title insurance endorsement premiums,  reasonable fees of Lender's
counsel and recording fees.

     12.  Borrower  hereby  agrees to execute and deliver to Lender such further
documents and instruments  evidencing or pertaining to the Loan, as modified and
increased hereby, as may be reasonably  requested by Lender from time to time so
as to evidence the terms and conditions hereof.

             [The balance of this page is intentionally left blank.]


FIFTH MODIFICATION AGREEMENT - Page 3
<PAGE>
     EXECUTED  on the  date(s)  set forth in the  acknowledgment(s)  below to be
EFFECTIVE as of the date first above written.

                                        BORROWER:

                                        LEGACY/MONTEREY HOMES L.P.,
                                        an Arizona limited partnership


                                        BY:  MTH-TEXAS GP, INC.,
                                             an Arizona corporation,
                                             General Partner


                                             By: /s/ Rick Morgan
                                                 -------------------------------
                                                 Name: Rick Morgan
                                                 Title: Vice President


                                        LENDER:

                                        GUARANTY FEDERAL BANK, F.S.B.,
                                        a federal savings lank


                                        By: /s/ Sam A. Meade
                                            ------------------------------------
                                            Name: Sam A. Meade
                                            Title: Senior Vice President


STATE OF TEXAS     ss.
                   ss.
COUNTY OF COLLIN   ss.

     This  instrument  was  ACKNOWLEDGED  before me on March 28,  2000,  by Rick
Morgan, Vice President of MTH-TEXAS GP, C., an Arizona  corporation,  as General
Partner of LEGACY/MONTEREY  HOMES L.P., AN ARIZONA limited partnership on behalf
of said limited partnership.,

[SEAL]
                                        /s/ Amy C. Kirkpatrick
                                        ----------------------------------------
                                        Notary Public

My Commission on Expires

       2/24/2001                        Amy C. Kirkpatrick
------------------------                ----------------------------------------
                                        Printed Name of Notary Public

FIFTH MODIFICATION AGREEMENT - Page 4
<PAGE>
STATE OF TEXAS    ss.
                  ss.
COUNTY OF DALLAS  ss.

     This instrument was acknowledged  before me on the 29th day of March, 2000,
by Sam A. Meade,  Senior Vice  President of GUARANTY  FEDERAL  BANK,  F.S.B.,  a
federal savings bank, on behalf of said federal savings bank.


[Seal]                                  /s/ Leslie Ruth Reynolds
                                        ----------------------------------------
                                        Notary Public in and for the
                                        above county and state


My Commission Expires:
                                        Leslie Ruth Reynolds
     02/04/2001                         ----------------------------------------
----------------------                  Printed Name of Notary


FIFTH MODIFICATION AGREEMENT - Page 5
<PAGE>
                              CONSENT OF GUARANTOR

     Each of the undersigned,  as a guarantor ("GUARANTOR," whether one or more)
of the loan (the  "LOAN"),  evidenced  by the Note and  secured  by the Deeds of
Trust described in the foregoing Fifth Modification  Agreement (the "Agreement")
to which this Consent is attached,  hereby  acknowledge and consent (jointly and
severally) to the terms of the Agreement and agree (jointly and severally)  that
the  execution  and  delivery of the  Agreement  will in no way change or modify
Guarantor's  respective  obligations under their respective Guaranty (as defined
in the  Agreement);  and each  Guarantor  acknowledges  and agrees  (jointly and
severally)  that the  Indebtedness  (as  defined in the  respective  instruments
comprising  the  Guaranty)  includes the Loan,  together  with any and all other
Indebtedness now or at any time hereafter owing by Guarantor to Lender; and each
Guarantor  (jointly  and  severally)  hereby   unconditionally   and  absolutely
guarantees  to Lender  the  payment  when due of such  Indebtedness,  and hereby
acknowledge  and agree  that  their  respective  Guaranty  is in full  force and
effect,  and that there are no claims,  counterclaims,  offsets or  defenses  to
their respective Guaranty; and each Guarantor acknowledges and consents (jointly
and severally) to the terms of any and all prior  modifications  to the terms of
the Loan  (including,  without  limitation,  any and all  extensions of the term
thereof and  increases in the  principal  thereof  prior to the date hereof,  if
any).

     EXECUTED  on the  date(s)  set forth in the  acknowledgment(s)  below to be
EFFECTIVE as of the 29th day of March, 2000.

                                        GUARANTOR:

                                        MERITAGE CORPORATION,
                                        a Maryland corporation


                                        By: /s/ John R Landon
                                            ------------------------------------
                                            Name: John R. Landon
                                            Title Co-CEO


                                        MTH-TEXAS GP, INC.,
                                        an Arizona corporation


                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President


                                        MTH-TEXAS LP, INC.,
                                        an Arizona corporation


                                        By: /s/ Rick Morgan
                                            ------------------------------------
                                            Name: Rick Morgan
                                            Title: Vice President


FIFTH MODIFICATION AGREEMENT - Page 6
<PAGE>
STATE OF TEXAS     ss.
                   ss.
COUNTY OF COLLIN   ss.

     This  instrument was  ACKNOWLEDGED  before me on March 28, 2000, by John R.
Landon,  Co-CEO of MERITAGE CORPORATION,  a Maryland  corporation,  on behalf of
said corporation.

                                        /s/ Amy C. Kirkpatrick
                                        ----------------------------------------
                                        Notary Public

My Commission expires:

      2/24/2001                         Amy C. Kirkpatrick
----------------------                  ----------------------------------------
                                        Printed Name of Notary Public


STATE OF TEXAS     ss.
                   ss.
COUNTY OF COLLIN   ss.

     This  instrument  was  ACKNOWLEDGED  before me on March 28,  2000,  by Rick
Morgan,  Vice  President of MERITAGE  CORPORATION,  a Maryland  corporation,  on
behalf of said corporation.

                                        /s/ Amy C. Kirkpatrick
                                        ----------------------------------------
                                        Notary Public

My Commission expires:

      2/24/2001                         Amy C. Kirkpatrick
----------------------                  ----------------------------------------
                                        Printed Name of Notary Public


STATE OF TEXAS     ss.
                   ss.
COUNTY OF COLLIN   ss.

     This  instrument  was  ACKNOWLEDGED  before me on March 28,  2000,  by Rick
Morgan,  Vice  President of MERITAGE  CORPORATION,  a Maryland  corporation,  on
behalf of said corporation.

                                        /s/ Amy C. Kirkpatrick
                                        ----------------------------------------
                                        Notary Public

My Commission expires:

      2/24/2001                         Amy C. Kirkpatrick
----------------------                  ----------------------------------------
                                        Printed Name of Notary Public


FIFTH MODIFICATION AGREEMENT - Page 7
<PAGE>
                                    EXHIBIT A

                       DESCRIPTION OF THE DEED(S) OF TRUST

LEGACY/MONTEREY, L.P.

Collin County       Recorded September 4, 1996, Clerk File 96-0075977

Dallas              Recorded September 5, 1996, Volume 96175 Page 00192

Denton              Recorded September 5, 1996, Clerk File 96-80061921

Fort Bend           Recorded January 28, 1999, Clerk File 199900703

Harris              Recorded August 6, 1997, Clerk File No. 5579911

Rockwall            Recorded August 19, 1997, Clerk File No. 176219

Tarrant             Recorded September 5, 1996, Clerk File D196175179

Travis              Recorded September 6, 1996, Volume 12766, Page 1157.

Williamson          Recorded September 9, 1996, Clerk File 9648096


EXHIBIT A, DESCRIPTION OF THE DEEDS OF TRUST - Page I
<PAGE>
                                                             LOAN NO.___________

                            REVOLVING PROMISSORY NOTE
                          (Fourth Amended and Restated)

$65,000,000.00                                                As of May 31, 1993

     FOR  VALUE  RECEIVED,  the  undersigned  (sometimes  referred  to herein as
"MAKER"), jointly and severally if more than one, promise to pay to the order of
GUARANTY  FEDERAL BANK,  F.S.B.,  a federal  savings bank organized and existing
under the laws of the United States  (sometimes  referred to herein as "PAYEE"),
at its principal offices at 8333 Douglas Avenue, Dallas, Texas 75225, or at such
other place as the holder hereof may from time to time designate,  the principal
sum of  SIXTY-FIVE  MILLION  AND NO/ 100  DOLLARS  ($65,000,000.00),  or so much
thereof as may be advanced,  with interest on the principal balance from time to
time  remaining  unpaid  prior to default or  maturity  at the rate  hereinafter
provided,  interest only being payable on the first day of each month commencing
June,  1993, and  continuing  until and including  July 31, 2000,  when,  unless
extended pursuant to the terms of Loan Agreement (hereafter defined), the unpaid
principal  balance of this Note,  together with all accrued and unpaid interest,
shall be due and payable.  The principal of this Note shall otherwise be payable
in accordance with the Loan Agreement. All payments due under this Note shall be
delivered  to the holder  hereof not later than twelve  o'clock,  noon,  Dallas,
Texas time,  on the date such  payment  becomes due and payable (or the date any
voluntary prepayment of this Note is made), in immediately  available funds. Any
payment  received  by the holder  hereof  after such time will be deemed to have
been made on the next following business day.

     As herein provided, the unpaid Principal Amount (hereafter defined) of this
Note (or portions  thereof)  from time to time  outstanding  shall bear interest
prior to maturity at a varying rate per annum equal to, at Maker's  option,  (i)
the Commercial Base Rate (hereafter defined),  or (ii) the applicable LIBOR Base
Rate  (hereafter  defined)  (as elected in the manner  specified  in this Note),
provided that in- no event shall the Applicable Rate (hereafter  defined) exceed
the Maximum Rate (hereafter defined).  Notwithstanding the foregoing,  if at any
time the Applicable Rate exceeds the Maximum Rate, the rate of interest  payable
under  this Note  shall be  limited  to the  Maximum  Rate,  but any  subsequent
reductions in the  Commercial  Base Rate or the LIBOR Base Rate, as the case may
be, shall not reduce the. Applicable Rate below the Maximum Rate until the total
amount of  interest  accrued on this Note  equals the total  amount of  interest
which would have accrued at the Applicable  Rate if the  Applicable  Rate had at
all times been in effect.  Interest on this Note shall be  calculated at a daily
rate equal to 1/360 of the annual  percentage rate stated above,  subject to the
provisions hereof specifying the maximum amount of interest which may be charged
or collected hereunder.

     As used in this Note, the following terms shall have the meanings indicated
opposite them:

     "ADDITIONAL COSTS" -- Any costs, losses or expenses incurred by Payee which
it determines are  attributable to its making or maintaining the Loan (hereafter
defined),  or its obligation to make any Loan advances,  or any reduction in any
amount receivable by Payee under the Loan or this Note.

     "APPLICABLE  RATE  -- The  Commercial  Base  Rate  (as to that  portion  of
 .Principal  Amount  bearing  interest at the  Commercial  Base Rate);  provided,
however  from and after May 15, 1998 , the  Applicable  Rate shall be either the
Commercial  Base  Rate  (as to that  portion  of the  Principal  Amount  bearing
interest  at the  Commercial  Base  Rate)  or the  LIBOR  Base  Rate (as to each
Euro-Dollar Amount) as elected in the manner specified in this Note.

     "ASSESSMENTS"  -- Any  impositions  and  assessments  imposed on Payee with
respect to any Euro-Dollar  Amount for insurance or other fees,  assessments and
surcharges.

                                       -1-
<PAGE>
     "COMMERCIAL BASE RATE" -- One percent (I %) per annum in excess of the base
rate announced or published from time to time by Guaranty Federal Bank,  F.S.B.,
which rate may not be the lowest rate charged by Guaranty Federal Bank,  F.S.B.;
it being  understood aril agreed that the Commercial Base Rate shall increase or
decrease, as the case may be, from time to time as of the effective date of each
change in such rate;  provided,  however,  from and after  August 1,  1995,  the
"Commercial  Base Rate" shall be the base rate  announced or published from time
to time by Guaranty Federal Bank, F.S.B.

     "EURO-DOLLAR  AMOUNT"  -- Each  portion  of the  Principal  Amount  bearing
interest  at the  applicable  LIBOR Base Rate  pursuant  to a  Euro-Dollar  Rate
Request.  There shall be no more than seven (7) portions of the Principal Amount
bearing  interest at an applicable LIBOR Base Rate outstanding at any time, each
such portion shall be in amounts of not less than  $1,000,000.00  each and in no
event shall the total portions of the Principal  Amount bearing  interest at the
LIBOR Base Rate exceed seventy percent (70%) of the Principal Amount of the time
of any Euro-Dollar Rate Request.

     "EURO-DOLLAR  BUSINESS DAY" -- Any day on which  commercial  banks are open
for domestic  and  international  business  (including  dealings in U.S.  Dollar
deposits) in New York City and Dallas, Texas.

     "EURO-DOLLAR  RATE  REQUEST" -- Maker's  telephonic  notice (to be promptly
confirmed  in a written  notice  which must be  received  by Payee  before  such
Euro-Dollar  Rate Request  will be put into effect by Payee),  to be received by
Payee by twelve o'clock noon (Dallas, Texas time) three (3) Euro-Dollar Business
Days prior to the  Euro-Dollar  Business Day specified in the  Euro-Dollar  Rate
Request for the  commencement  of the Interest  Period,  of (a) its intention to
have  (1) all or any  portion  of the  Principal  Amount  which  is not then the
subject  of  an  Interest  Period  (other  than  an  Interest  Period  which  is
terminating on such Euro-Dollar  Business Day), and/or (2) all or any portion of
any advance of Loan proceeds  which is to be made on such  Euro-Dollar  Business
Day, bear interest at the LIBOR Base Rate,  and (b) the Interest  Period desired
by Maker in respect of the amount  specified.  There shall be no more than three
(3) such requests for an election outstanding at any time.

     "EURO-DOLLAR  RATE REQUEST AMOUNT" -- The amount,  to be specified by Maker
in each  Euro-Dollar  Rate Request and stated in  increments  of  $1,000,000.00,
which Maker desires to bear interest at the LIBOR Base Rate; provided,  however,
in no event shall an such amount be less than $1,000,000.00 in each instance.

     "EURO-DOLLAR  REFERENCE  SOURCE"  --  The  display  for  Euro-Dollar  rates
provided on The Bloomberg (a data service),  viewed by accessing Page One (I) of
the global  deposits  segment of  money-market  rates (or such other page as may
replace Page One [ 1 ] for the purposes of displaying Euro-Dollar rates); or, at
the option of Payee the  display  for  Euro-Dollar  rates on such other  service
selected from time to time by Payee and  determined by Payee to be comparable to
The  Bloomberg,  which other  service may include  Reuters  Monitor  Money Rates
Service.

     "INTEREST  PERIOD" -- The period  during  which  interest at the LIBOR Base
Rate, determined as provided in this Note, shall be applicable to the applicable
Euro-Dollar Rate Request Amount; provided,  however, that each such period shall
be either  thirty (30),  ninety (90),  or one hundred  eighty (180) days,  which
shall be measured  from the date  specified  by Maker in each  Euro-Dollar  Rate
Request for the  commencement  of the  computation of interest at the LIBOR Base
Rate, to the numerically  corresponding  day in the calendar month in which such
period terminates (or, if there be no numerical  correspondent in such month, or
if the date  selected  by Maker for such  commencement  is the last  Euro-Dollar
Business Day of a calendar month, then the last Euro-Dollar  Business Day of the
calendar  month  in  which  such  period  terminates,  or,  if  the  numerically
corresponding  day is not a Euro-Dollar  Business Day, then the next  succeeding
Euro-Dollar  Business Day, unless such next succeeding  Euro-Dollar Business Day
enters a new  calendar  month,  in which case such period  shall end on the next
preceding  Euro-Dollar  Business  Day); and in no event shall any such period be
elected which extends beyond the Maturity Date.

                                       -2-
<PAGE>
     "LIBOR BASE RATE" -- With respect to any Euro-Dollar  Amount,  the rate per
annum (expressed as a percentage)  determined by Payee to be equal to the sum of
(a) the quotient of the LIBOR Rate for the applicable Euro-Dollar Amount and the
applicable  Interest  Period,   divided  by  (1  minus  the  applicable  Reserve
Requirement),  rounded up to the nearest  1/100 of I%,  PLUS (b) the  applicable
Assessments,  plus (c) two and one-half percent (2.5%);  provided,  however from
and after March ___,  1999, the LIBOR Base Rate shall be equal to the sum of (a)
the  quotient of the LIBOR Rate for the  applicable  Euro-Dollar  Amount and the
applicable  Interest  Period,   divided  by  (1  minus  the  applicable  Reserve
Requirement),  rounded up to the nearest  1/100 of 1%,  PLUS (b) the  applicable
Assessments,  PLUS (c) two and  one-quarter  percent (2.25%)  provided,  further
however  from and after March _-_,  2000,  the LIBOR Base Rate shall be equal to
the sum of (a) the  quotient  of the LIBOR Rate for the  applicable  Euro-Dollar
Amount and the applicable  Interest  Period,  divided by (1 minus the applicable
Reserve  Requirement),  rounded  up to the  nearest  1/100  of 1%,  plus (b) the
applicable Assessments, plus (c) two percent (2.0%);

     "LIBOR RATE" -- The rate determined by Payee (rounded upward, if necessary,
to the nearest  1/16 of 1%) equal to the offered rate (and not the bid rate) for
deposits in U.S.  Dollars of amounts  comparable to the Euro-Dollar Rate Request
Amount for the same period of time as the Interest  Period  selected by Maker in
the Euro-Dollar Rate Request,  as set forth on the Euro-Dollar  Reference Source
at  approximately  10:00  a.m.  (Dallas,  Texas  time) on the  first  day of the
applicable Interest Period.

     "LOAN" -- The $65,000,000.00 loan evidenced hereby.

     "MATURITY DATE" -- July 31, 2000,  being the date this Note becomes due and
payable  in its  entirety,  unless  extended  pursuant  to the terms of the Loan
Agreement.

     "MAXIMUM RATE" -- The maximum interest rate permitted under applicable law.

     "PRINCIPAL  AMOUNT" -- That portion of the Loan evidenced hereby as is from
time to time outstanding.

     "REGULATION  D" --  Regulation  D of the Board of  Governors of the Federal
Reserve System, as from time to time amended or supplemented.

     "REGULATION"  -- With respect to the charging and collecting of interest at
the LIBOR Base Rate, any United States federal, state or foreign laws, treaties,
rules or regulations whether now in effect or hereinafter enacted or promulgated
(including Regulation D) or any interpretations, directives or requests applying
to a class of depository  institutions  including  Payee under any United States
federal,  state or foreign laws or regulations  (whether or not having the force
of law) by any court or  governmental  or monetary  authority  charged  with the
interpretation  or  administration  thereof,  excluding any change the effect of
which is determined by Payee to be reflected in a change in the LIBOR Base Rate.

     "RESERVE  REQUIREMENT"  -- The  average  maximum  rate  at  which  reserves
(including any marginal,  supplemental or emergency reserves) are required to be
maintained  under  Regulation D by member banks of the Federal Reserve System in
New  York  City  with  deposits  exceeding  one  billion  U.S.  Dollars  against
"Eurocurrency Liabilities," as such quoted term is used in Regulation D. Without
limiting the effect of the foregoing,  the Reserve Requirement shall reflect any
other  reserves  required to be maintained by such member banks by reason of any
regulatory  change  against  (a) any  category  of  liabilities  which  includes
deposits by reference to which the LIBOR Rate is to be determined as provided in
this Note,  or (b) any category of  extensions  of credit or. other assets which
includes  loans the interest  rate on which is  determined on the basis of rates
referred to in the definition of "LIBOR Rate" set forth above.

     If Maker desires the  application of the LIBOR Base Rate, it shall submit a
Euro-Dollar  Rate Request to Payee.  Such Euro-Dollar Rate Request shall specify
the Interest Period and the Euro-Dollar Amount and shall be irrevocable, subject
to Payee's right to convert the rate of interest payable  hereunder with respect
to any  Euro-Dollar  Amount from the LIBOR Base Rate to the Commercial Base Rate

                                       -3-
<PAGE>
as hereinafter  provided.  In the event that Maker fails to submit a Euro-Dollar
Rate  Request  with  respect to an  existing  Euro-Dollar  Amount not later than
twelve o'clock noon (New York time) three (3) Euro-Dollar Business Days prior to
the last day of the relevant  Interest Period,  then the applicable  Euro-Dollar
Amount shall bear interest,  commencing at the end of such Interest  Period,  at
the Commercial Base Rate.

     In no event shall Maker have more than seven (7) Interest Periods involving
Euro-Dollar Amounts in effect at any one time, whether or not any portion of the
Principal Amount is then bearing interest at the Commercial Base Rate.

     Any portion of the Principal Amount to which the LIBOR Base Rate is not (or
pursuant to the terms hereof  cannot be)  applicable  shall bear interest at the
Commercial Base Rate.

     Maker  shall  pay to Payee,  promptly  upon  demand,  such  amounts  as are
necessary to compensate Payee for Additional Costs resulting from any Regulation
which (i)  subjects  Payee to any tax,  duty or other charge with respect to the
Loan or this Note,  or changes the basis of  taxation of any amounts  payable to
Payee under the Loan or this Note  (other than taxes  imposed on the overall net
income of Payee or of its applicable lending office by the jurisdiction in which
Payee's  principal  office or such applicable  lending office is located),  (ii)
imposes,  modifies or deems  applicable any reserve,  special deposit or similar
requirements  relating to any  extensions  of credit or other  assets of, or any
deposits with or other  liabilities  of, Payee,  or (iii) imposes on Payee or on
the interbank  Euro-Dollar market any other condition affecting the Loan or this
Note,  or any of such  extensions  of credit or  liabilities.  Payee will notify
Maker of any event which would  entitle Payee to  compensation  pursuant to this
paragraph as promptly as practicable  after Payee obtains  knowledge thereof and
determines to request such compensation.

     Without limiting the effect of the immediately preceding paragraph,  in the
event that, by reason of any Regulation, (i) Payee incurs Additional Costs based
on or measured by the amount of (1) a category of deposits or other  liabilities
of Payee  which  includes  deposits  by  reference  to which the  LIBOR  Rate is
determined  as  provided in this Note  and/or (2) a category  of  extensions  of
credit or other  assets of Payee which  includes  loans the interest on which is
determined on the basis of rates  referred to in the  definition of "LIBOR Rate"
set forth above,  (ii) Payee becomes  subject to  restrictions  on the amount of
such a category of liabilities or assets which it may hold, or (iii) it shall be
unlawful or  impractical  for Payee to make or maintain the Loan (or any portion
thereof) at the LIBOR Base Rate, then Payee's obligation to make or maintain the
Loan (or portions  thereof) at the LIBOR Base Rate (and Maker's right to request
the same) shall be suspended  and Payee shall give notice  thereof to Maker and,
upon the giving of such  notice,  interest  payable  hereunder at the LIBOR Base
Rate shall be converted to the Commercial  Base Rate,  unless Payee may lawfully
continue to maintain the Loan (or any portion  thereof) then bearing interest at
the LIBOR Base Rate to the end of the current Interest Period(s),  at which time
the interest rate shall  convert to the  Commercial  Base Rate. If  subsequently
Payee determines that such Regulation has ceased to be in effect,  Payee will so
advise Maker and Maker may convert the rate of interest  payable  hereunder with
respect to those  portions  of the  Principal  Amount  bearing  interest  at the
Commercial  Base Rate to the LIBOR Base Rate by  submitting a  Euro-Dollar  Rate
Request in respect  thereof and otherwise  complying with the provisions of this
Note with respect thereto.

     Determinations by Payee of the existence or effect of any Regulation on its
costs of making or maintaining the Loan, or portions thereof,  at the LIBOR Base
Rate, or on amounts  receivable by it in respect thereof,  and of the additional
amounts  required to compensate  Payee with respect to  Additional  Costs and/or
Assessments,  shall be conclusive;  provided,  however, that such determinations
are made without manifest error.

     Anything  herein  to the  contrary  notwithstanding,  if, at the time of or
prior to the  determination of the LIBOR Base Rate in respect of any Euro-Dollar
Rate Request Amount as herein provided,  Payee determines  (which  determination
shall be conclusive  [provided that such  determination  is made on a reasonable
basis] absent manifest error) that (i) by reason of circumstances  affecting the
interbank  Euro-Dollar market generally,  adequate and fair means do not or will
not exist for determining the LIBOR Base Rate applicable to an Interest  Period,
or (ii) the LIBOR Rate, as determined by Payee, will not accurately  reflect the

                                       -4-
<PAGE>
cost to Payee of making or maintaining the Loan (or any portion  thereof) at the
LIBOR Base Rate,  then Payee shall give Maker  prompt  notice  thereof,  and the
applicable  Euro-Dollar Rate Request Amount shall bear interest,  or continue to
bear interest,  as the case may be, at the Commercial  Base Rate. If at any time
subsequent  to the giving of such  notice,  Payee  determines  that because of a
change  in  circumstances  the  LIBOR  Base  Rate is  again  available  to Maker
hereunder,  Payee  shall so  advise  Maker and  Maker  may  convert  the rate of
interest payable  hereunder from the Commercial Base Rate to the LIBOR Base Rate
by submitting a Euro-Dollar  Rate Request to Payee and otherwise  complying with
the provisions of this Note with respect thereto.

     Maker shall pay to Payee,  immediately  upon  request  and  notwithstanding
contrary  provisions  contained in the Deeds of Trust (as hereafter  defined) or
other Loan  Instruments  (as hereafter  defined),  such amounts as shall, in the
conclusive  judgment of Payee  reasonably  exercised,  compensate  Payee for any
loss,  cost  or  expense  incurred  by it as a  result  of (i)  any  payment  or
prepayment,  under any circumstances whatsoever, of any portion of the Principal
Amount bearing interest at the LIBOR Base Rate on a date other than the last day
of  an  applicable  Interest  Period,  (ii)  the  conversion,   for  any  reason
whatsoever,  of the rate of interest payable  hereunder from the LIBOR Base Rate
to the Commercial Base Rate with respect to any portion of the Principal  Amount
then  bearing  interest at the LIBOR Base Rate on a date other than the last day
of an applicable  Interest  Period,  (iii) the failure of all or a portion of an
advance,  which was to have borne  interest at the LIBOR Base Rate pursuant to a
Euro-Dollar  Rate  Request,  to be made  under the Loan  Agreement,  or (iv) the
failure  of Maker to  borrow  in  accordance  with a  Euro-Dollar  Rate  Request
submitted by it to Payee, which amounts shall include, without limitation,  lost
profits.

     Maker shall have the right to prepay,  in whole or in part,  the  Principal
Amount of this Note  accruing  interest  at the  Commercial  Base Rate,  without
premium  or  penalty  upon the  payment of all  accrued  interest  on the amount
prepaid  (and any  interest  which has  accrued at the Default  Rate  (hereafter
defined) and other sums that may be payable hereunder);  provided, however, that
any  Euro-Dollar  Amount may be prepaid  only on the last day of the  applicable
Interest Period.

     All payments of principal shall be credited first against principal amounts
bearing  interest  at the  Commercial  Base Rate and then  toward the payment of
Euro-Dollar  Amounts.  Payments of Euro-Dollar  Amounts shall be applied in such
manner as Maker  shall  select;  provided,  however,  that  Maker  shall  select
Euro-Dollar  Amounts to be repaid in a manner  designed to  minimize  any losses
incurred  by  virtue  of  such  payment.  If  Maker  shall  fail to  select  the
Euro-Dollar  Amounts to which such payments are to be applied, or if an event of
default has occurred and is continuing at the time of payment,  then Payee shall
be entitled to apply the  payment to such  Euro-Dollar  Amounts in the manner it
deems  appropriate.  Maker  shall  compensate  Payee for any losses  incurred by
virtue of any  payment of those  portions of the Loan  accruing  interest at the
LIBOR Base Rate prior to the last day of the  relevant  Interest  Period,  which
compensation  shall be determined in accordance with the provisions set forth in
this Note, and any payment received  pursuant to this paragraph shall be applied
first to losses incurred by Payee by reason of such payment.

     If a  default  shall  occur  under  the  Deeds of  Trust,  interest  on the
Principal  Amount shall, at the option of Payee,  immediately and without notice
to Maker,  be converted to the Commercial  Base Rate.  The foregoing  provisions
shall not be  construed  as a waiver  by Payee of its right to pursue  any other
remedies  available  to it under  the  Deeds of  Trust or any  other  instrument
evidencing  or securing the Loan,  nor shall it be construed to limit in any way
the application of the Default Rate.

     Maker hereby agrees that it shall be bound by any  agreement  extending the
time or  modifying  the above terms of  payment,  made by Payee and the owner or
owners of tic Property, whether with or without notice to Maker, and Maker shall
continue liable to pay the amount due hereunder,  but with interest at a rate no
greater than the LIBOR Base Rate or the  Commercial  Base Rate,  as the case may
be, according to the terms of any such agreement of extension or modification.

     ALL OR ANY PORTION OF THE  PRINCIPAL  OF THIS NOTE MAY BE  BORROWED,  PAID,
PREPAID,  REPAID  AND  REBORROWED,  FROM  TIME TO TIME  PRIOR  TO  MATURITY,  IN
ACCORDANCE  WITH THE PROVISIONS OF THIS NOTE AND THE OTHER LOAN  INSTRUMENTS (AS
HEREAFTER  DEFINED).  THE EXCESS OF BORROWING  (ADVANCES  AND  READVANCES)  OVER

                                       -5-
<PAGE>
REPAYMENTS SHALL EVIDENCE THE PRINCIPAL BALANCE DUE HEREON FROM TIME TO TIME AND
AT ANY TIME.  THE  AGGREGATE OF ALL ADVANCES MADE UNDER THIS NOTE MAY EXCEED THE
FACE AMOUNT OF THIS NOTE, BUT THE OUTSTANDING  PRINCIPAL BALANCE OF THIS NOTE AT
ANY TIME SHALL NEVER EXCEED THE FACE AMOUNT OF THIS NOTE.

     At the  option of the  holder  hereof,  the entire  principal  balance  and
accrued interest owing hereon shall,  subject to applicable laws, at once become
due and payable  without notice or demand upon the occurrence at any time of any
of the following events ("EVENTS OF DEFAULT"):

     1.   Default in the payment of any  installment  of principal,  interest or
          any  other  sum  due  hereunder  or  under  any  document  evidencing,
          governing,   securing  or  guaranteeing  the  Loan  (individually  and
          collectively,  the "LOAN  INSTRUMENTS")  and the  continuation of such
          default  or a period of  fifteen  (.15)  days  following  the due date
          thereof;  or defaults in the  performance  of any of the  covenants or
          provisions of any of the Loan  Instruments  other than those covenants
          or  provisions  involving  the  payment of the sums  described  in the
          preceding clause in this PARAGRAPH 1.

     2.   The   liquidation,   termination,   dissolution  or  (if  any  of  the
          undersigned is a natural  person) the death of any of the  undersigned
          or any guarantor hereof.

     3.   The  bankruptcy or insolvency  of, the  assignment  for the benefit of
          creditors by, or the appointment of a receiver for any of the property
          of any party  liable for the  payment of this Note,  whether as maker,
          endorser, guarantor, surety or otherwise.

     4.   Default  in the  payment  of any  other  indebtedness  due the  holder
          hereof,  or default in the performance of any other  obligation to the
          holder  hereof by the  undersigned  or any other party  liable for the
          payment hereof, whether as endorser,  guarantor,  surety or otherwise,
          it being reasonably  contemplated by the undersigned that it may incur
          additional indebtedness owing to the holder hereof, from time to time,
          subsequent to the date hereof.

     5.   Notice of default given by any other lender or third party (the "OTHER
          LENDERS") to the undersigned or the  acceleration of any  indebtedness
          owed by the  undersigned  to the Other Lenders  under any  instruments
          evidencing, governing, guaranteeing or securing any other indebtedness
          or obligation,  now or hereafter owed by the  undersigned to the Other
          Lenders.

     The failure to exercise the option to accelerate  the maturity of this Note
upon the happening of any one or more of the events of default  hereunder  shall
not  constitute a waiver of the right of the holder  hereof to exercise the same
or any other option at that time or at any subsequent  time with respect to such
uncured  default or any other event of uncured  default  hereunder  or under any
other of the Loan Instruments. The remedies of the holder hereof, as provided in
this  Note and in any other of the Loan  Instruments,  shall be  cumulative  and
concurrent and may be pursued separately,  successively or together, as often as
occasion therefor shall arise, at the sole discretion of the holder hereof.  The
acceptance  by the holder  hereof of any  payment  under this Note which is less
than  payment in full of all amounts due and payable at the time of such payment
shall not constitute a waiver of or impair, reduce, release or extinguish any of
the rights or remedies of the holder hereof to exercise the foregoing  option or
any  other  option  granted  to the  holder  hereof  or in any other of the Loan
Instruments,  at that  time or at any  subsequent  time,  or  nullify  any prior
exercise of any such option.

     The unpaid  principal of and, to the extent  permitted by  applicable  law,
unpaid interest on this Note from time to time  outstanding  shall bear interest
from and after  maturity at the rate  (hereafter  called the "DEFAULT  RATE") of
five  percent  (5%) per annum above the  Commercial  Base Rate (as such rate may
change from time to time as  provided  above),  provided  that in no event shall
such interest rate be more than the Maximum  Rate.  Notwithstanding  anything to
the contrary contained in this Note, at the option of the holder hereof and upon
notice to the  undersigned  at any time after the  occurrence  of a default,  as
defined  in the Deeds of Trust,  from and  after  such  notice  and  during  the
continuance of such default, the unpaid principal of this Note from time to time

                                       -6-
<PAGE>
outstanding  and all past due  installments  of  interest  shall,  to the extent
permitted by applicable law, bear interest at the Default Rate (as such rate may
change from time to time with each change in the Commercial Base Rate), provided
that in no event shall such interest rate be more than the Maximum Rate.

     The  undersigned  and all other  parties  now or  hereafter  liable for the
payment hereof, whether as endorser,  guarantor, surety or otherwise,  severally
waive demand, presentment, notice of dishonor, notice of intention to accelerate
the indebtedness  evidenced  hereby,  notice of the acceleration of the maturity
hereof,  diligence in collecting,  grace, notice and protest, and consent to all
extensions  which from time to time may be  granted by the holder  hereof and to
all partial payments hereon, whether before or after maturity.

     If this Note is not paid when due,  whether at maturity or by acceleration,
or if it is collected  through a  bankruptcy,  probate or other  court,  whether
before or after maturity, the undersigned agrees to pay all costs of collection,
including but not limited to reasonable  attorneys' fees and expenses,  incurred
by the holder hereof.

     This Note is  executed  pursuant to a Master  Loan  Agreement,  dated as of
January 31, 1993,  between the undersigned and the payee named herein (the "LOAN
AGREEMENT"),  which Loan Agreement  contains  provisions for acceleration of the
maturity  hereof upon the  happening of certain  events,  and all advances  made
hereunder shall be made pursuant to the Loan Agreement.  This Note is secured by
one or more Deeds of Trust (With Security  Agreement and Assignment of Rents and
Leases) (collectively,  the "DEEDS OF TRUST") covering certain property situated
in  various  Counties  in Texas.  The  proceeds  of this Note are to be used for
business,  commercial,  investment  or other  similar  purposes  and no  portion
thereof will be used for personal, family or household use.

     This Note is given in renewal,  replacement and  rearrangement,  and not in
extinguishment  of, the  indebtedness  evidenced by that  certain (i)  Revolving
Promissory Note in the amount of $17,000,000.00, dated May 31, 1993, as executed
by Maker and payable to Payee,  (ii)  Revolving  Promissory  Note  (Amended  and
Restated) in the amount of  $40,000,000.00  (as increased),  dated as of May 31,
1993, as executed by Maker and payable to Payee, and (iii) Revolving  Promissory
Note (Second Amended and Restated) in the amount of $50,000,000.00,  dated as of
May 31, 1993, as executed by Maker and payable to Payee,  and (iv) and Revolving
Promissory Note (Third Amended and Restated) in the amount of $80,000,000.00 (as
increased), dated as of May 31, 1993, as executed by Maker and payable to Payee.

     All agreements  between the undersigned and the holder hereof,  whether now
existing or hereafter arising and whether written or oral, are hereby limited so
that in no contingency, whether by reason of acceleration of the maturity hereof
or otherwise,  shall the interest  contracted for,  charged,  received,  paid or
agreed to be paid to the holder  hereof  exceed the  Maximum  Rate.  If from any
circumstance  the holder  hereof  shall ever  receive  anything of value  deemed
interest by applicable law in excess of the Maximum Rate, an amount equal to any
excessive interest shall be applied to the reduction of the principal hereof and
not to the payment of interest, or if such excessive interest exceeds the unpaid
balance of principal  hereof,  such excess shall be refunded to the undersigned.
All interest paid or agreed to be paid to the holder hereof shall, to the extent
permitted by  applicable  law, be  amortized,  prorated,  allocated,  and spread
throughout  the full period until  payment in full of the  principal so that the
interest  hereon for such full period  shall not exceed the Maximum  Rate.  This
paragraph  shall control all agreements  between the  undersigned and the holder
hereof.

     The  undersigned  acknowledges  and agrees that the holder hereof may, from
time  to  time,  sell or  offer  to sell  interests  in the  Loan to one or more
participants.  The  undersigned  authorizes the holder hereof to disseminate any
information  it has  pertaining  to the  Loan,  including,  without  limitation,
complete  and  current  credit  information  on  the  undersigned,  any  of  its
principals  and  any  guarantor  of  this  Note,  to  any  such  participant  or
prospective participant.

                                       -7-
<PAGE>
     EXCEPT WHERE FEDERAL LAW IS APPLICABLE (INCLUDING,  WITHOUT LIMITATION, ANY
FEDERAL  USURY  CEILING  OR OTHER  FEDERAL  LAW  WHICH,  FROM  TIME TO TIME,  IS
APPLICABLE TO THE  INDEBTEDNESS  EVIDENCED HEREIN AND WHICH PREEMPTS STATE USURY
LAWS),  THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS,  AND THE LAWS OF THE UNITED  STATES  APPLICABLE TO  TRANSACTIONS  IN SUCH
STATE.  THE  UNDERSIGNED  ACKNOWLEDGES  THAT  THE  LIEN OF THE  DEEDS  OF  TRUST
CONSTITUTES A FIRST LIEN ON RESIDENTIAL REAL PROPERTY WITHIN THE MEANING OF PART
A, TITLE V, OF THE DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT
OF 1980, AND THE REGULATIONS PROMULGATED THEREUNDER.

                                        MAKER:

                                        LEGACY/MONTEREY HOMES L.P.,
                                        an Arizona limited partnership


                                        BY:  MTH-TEXAS GP, INC.,
                                             an Arizona corporation,
                                             General Partner


                                             By: /s/ Rick Morgan
                                                 -------------------------------
                                                 Name: Rick Morgan
                                                 Title: Vice President

                                       -8-