10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2005
	or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission file number: 001-13417

Hanover Capital Mortgage Holdings, Inc.

(Exact name of registrant as specified in its charter)

Maryland	13-3950486
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

379 Thornall Street, Edison, New Jersey 08837

(Address of principal executive offices) (Zip Code)

(732) 548-0101

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o

The registrant had 8,401,940 shares of common stock outstanding as of May 11, 2005.

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

FORM 10-Q

For the Three Months Ended March 31, 2005

INDEX

		Page No.
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements		2
	Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004 (note 2)		2
	Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004 (unaudited)		3
	Consolidated Statements of Other Comprehensive Income for the Three Months Ended March 31, 2005 and 2004 (unaudited)		4
	Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2005 (unaudited)		5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (unaudited)		6
	Notes to Consolidated Financial Statements (unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.	Controls and Procedures		29
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	Submission of Matters to a Vote of Security Holders		30
Item 5.	Other Information		30
Item 6.	Exhibits		30
	Signatures		31
Ex-10.12 Employment Agreement dated 4/14/05
Ex-10.36.17 Indemnity Agreement dated 4/14/05
Ex-31.1 Section 302 Certification of the C.E.O.
Ex-31.2 Section 302 Certification of the C.F.O.
Ex-32.1 Section 906 Certification of the C.E.O. and C.F.O.

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

		March 31,			December 31,
		2005			2004
		(Unaudited)			(Note 2)
Assets
Cash and cash equivalents		$	32,722		$	20,604
Accounts receivable			2,003			2,153
Accrued interest receivable			1,065			1,036
Mortgage loans
	Held for sale		171			175
	CMO collateral		38,493			40,926
Mortgage securities pledged under repurchase agreements
	Available for sale		60,332			54,312
	Trading		92,198			99,142
Mortgage securities, not pledged
	Available for sale		6,047			—
	Trading		10,626			11,126
Equity investments in unconsolidated affiliates			3,590			3,067
Other assets			10,301			9,597
		$	257,548		$	242,138
Liabilities
Repurchase agreements		$	127,425		$	130,102
Collateralized mortgage obligations (CMOs)			32,855			35,147
Dividends payable			—			2,514
Accounts payable, accrued expenses and other liabilities			3,988			3,156
Liability to subsidiary trust issuing preferred securities			20,619			—
			184,887			170,919
Stockholders’ Equity
Preferred stock: $0.01 par value, 10 million shares authorized, no shares issued and outstanding			—			—
Common stock: $0.01 par value, 90 million shares authorized, 8,381,583 shares issued and outstanding as of March 31, 2005 and December 31, 2004			84			84
Additional paid-in capital			103,126			103,126
Notes receivable from related parties			(583	)		(583	)
Retained earnings (deficit)			(29,416	)		(30,779	)
Accumulated other comprehensive income			(550	)		(629	)
			72,661			71,219
		$	257,548		$	242,138

See notes to consolidated financial statements

2

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

			Three Months Ended
			March 31,
			2005			2004
Revenues
	Interest income		$	3,832		$	3,102
	Interest expense			1,572			820
		Net interest income		2,260			2,282
	Loan loss provision			7			10
		Net interest income after loan loss provision		2,253			2,272
	Gain on sale of mortgage assets			2,280			3,458
	Loss on mark to market of mortgage assets			(1,628	)		(57	)
	Gain (loss) on freestanding derivatives			708			(1,066	)
	Due diligence fees			1,993			1,380
	Assignment fees			549			585
	Technology			554			388
	Loan brokering and advisory services			512			491
	Reimbursed out-of-pocket expenses			463			343
	Other income			56			91
		Total revenues		7,740			7,885
Expenses
	Personnel			2,260			2,304
	Subcontractors			1,181			1,050
	Legal and professional			920			587
	General and administrative			388			447
	Depreciation and amortization			281			216
	Occupancy			135			117
	Technology			295			97
	Travel and entertainment			102			141
	Out-of-pocket expenses reimbursed			463			343
	Other			299			145
		Total expenses		6,324			5,447
		Operating income		1,416			2,438
Equity in (loss) income of unconsolidated affiliates				(96	)		24
Income before income tax provision (benefit)				1,320			2,462
Income tax provision (benefit)				(43	)		(83	)
Net Income			$	1,363		$	2,545
Basic Earnings Per Share			$	.16		$	.31
Diluted Earnings Per Share			$	.16		$	.31

See notes to consolidated financial statements

3

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

		Three Months Ended
		March 31,
		2005			2004
Net income		$	1,363		$	2,545
Other comprehensive Income:
	Net unrealized (loss) gain on securities classified as available for sale		(11	)		814
	Reclassification adjustment for net gain (loss) included in net income		90			(366	)
Other comprehensive income			79			448
	Comprehensive income	$	1,442		$	2,993

See notes to consolidated financial statements

4

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

	Three Months Ended March 31, 2005
							Notes						Accumulated
	Common Stock				Additional		Receivable			Retained			Other
					Paid-In		from			Earnings			Comprehensive
	Shares		Amount		Capital		Related Parties			(Deficit)			Income			Total
Balance, December 31, 2004		8,381,583	$	84	$	103,126	$	(583	)	$	(30,779	)	$	(629	)	$	71,219
Net income											1,363						1,363
Other comprehensive income														79			79
Dividends declared											—						—
Balance, March 31, 2005		8,381,583	$	84	$	103,126	$	(583	)	$	(29,416	)	$	(550	)	$	72,661

See notes to consolidated financial statements

5

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

				Three Months Ended
				March 31,
				2005			2004
Operating Activities
	Net income			$	1,363		$	2,545
	Adjustments to reconcile net income to net cash provided by (used in)operating activities:
		Depreciation and amortization			281			216
		Accretion of net discount			(635	)		(529	)
		Loan loss provision			7			10
		Loss recognized from mark to market of mortgage assets			1,628			57
		Undistributed losses (earnings) of unconsolidated affiliates — net			96			(24	)
		Gain on sale of mortgage assets			(2,280	)		(3,458	)
		Gain on disposition of real estate owned			—			(27	)
		Purchase of trading securities			—			(12,716	)
		Decrease in accounts receivable			150			67
		Increase in accrued interest receivable			(29	)		(44	)
		(Increase) decrease in other assets			(985	)		1,234
		Increase in accounts payable, accrued expenses and other liabilities			212			174
			Net cash used in operating activities		(192	)		(12,495	)
Investing Activities
	Purchase of available for sale mortgage securities				(27,333	)		(11,920	)
	Principal collections on mortgage securities				6,092			1,452
	Principal collections on CMO collateral				2,412			4,790
	Principal collections on mortgage loans held for sale				4			77
	Proceeds from sale of mortgage assets				17,989			16,121
	Proceeds from disposition of real estate owned				—			44
	Capital investment in unconsolidated affiliates				(619	)		(537	)
			Net cash (used in) provided by investing activities		(1,455	)		10,027
Financing Activities
	Proceeds from issuance of junior subordinated notes to subsidiary trust issuing preferred securities				20,619			—
	Proceeds from borrowings on line of credit				620			—
	(Decrease) increase in borrowings using repurchase agreements				(2,677	)		7,788
	Payments on CMOs				(2,283	)		(4,680	)
	Payment of dividends				(2,514	)		(5,750	)
			Net cash provided by (used in) financing activities		13,765			(2,642	)
Net increase (decrease) in cash and cash equivalents					12,118			(5,110	)
Cash and cash equivalents at beginning of period					20,604			32,588
Cash and cash equivalents at end of period				$	32,722		$	27,478

See notes to consolidated financial statements

6

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business

      Hanover Capital Mortgage Holdings, Inc. (“Hanover”) is a real estate investment trust (“REIT”) formed to operate as a specialty finance company. Hanover has two primary subsidiaries: Hanover Capital Partners Ltd. (“HCP”) and HanoverTrade, Inc. (“HT”). When we refer to the “Company,” we mean Hanover together with its consolidated subsidiaries.

      The Company’s principal business is the REIT that generates net interest income on its portfolio of mortgage securities and mortgage loans on a leveraged basis. Secondarily, mortgage industry service and technology related income is earned through HCP and HT.

2. Basis of Presentation

Interim Financial Reporting

      The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended March 31, 2005 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2005. For further information refer to the consolidated financial statements and footnotes thereto incorporated by reference in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

Stock-Based Compensation

      Hanover accounts for stock-based awards under the recognition and measurement principles of the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations (“APB25”). Under APB25 Hanover has not recognized as compensation expense the value of stock-based awards. Hanover did not issue stock awards during the three months ended March 31, 2005 and 2004.

      In December 2004 the Financial Accounting Standards Board (FASB) revised Statement of Financial Accounting Standards No. 123 “Accounting for Stock-based Compensation” (“SFAS 123”) that supercedes APB25 and requires the use of a fair value based methodology (similar to the original SFAS 123 methodology) to measure and record expenses and liabilities associated with stock-based compensation. The revised standard is required to be adopted by Hanover beginning January 1, 2006 and is applicable to any new awards and to all existing awards for which the requisite service to earn the award has not yet been rendered. The effect of adopting the revised standard is not expected to be material to Hanover’s earnings or financial condition.

7

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

3. Stockholders’ Equity and Earnings Per Share

Common Stock Issued and Outstanding

			Three Months Ended
			March 31,
			2005		2004
Beginning of period
	Issued and outstanding			8,381,583		8,192,903
Activity
	Common stock paid for acquisition			—		35,419
		Net Activity		—		35,419
End of period
	Issued and Outstanding			8,381,583		8,228,322

Earnings Per Share

(Dollars in thousands, except share and per share data)

			Three Months Ended
			March 31,
			2005		2004
Basic earnings per share:
	Net income (numerator)		$	1,363	$	2,545
	Weighted-average common shares outstanding (denominator)			8,381,583		8,209,250
		Basic earnings per share	$	.16	$	.31
Diluted earnings per share:
	Net income (numerator)		$	1,363	$	2,545
	Weighted-average common shares outstanding			8,381,583		8,209,250
		Add: Incremental shares from assumed conversion of stock options		26,752		77,795
	Diluted weighted-average shares outstanding (denominator)			8,408,335		8,287,045
		Diluted earnings per share	$	.16	$	.31

4. Mortgage Loans — Carrying value

      Mortgage loans classified as held for sale are carried at the lower of cost or market and consist of approximately $11,000 in fixed rate mortgages and $160,000 in adjustable rate mortgages as of March 31, 2005.

CMO Collateral

(Dollars in thousands)

	March 31, 2005									December 31, 2004
	Fixed			Adjustable						Fixed			Adjustable
	Rate			Rate			Total			Rate			Rate			Total
Principal amount	$	21,469		$	17,316		$	38,785		$	23,058		$	18,139		$	41,197
Net premium (discount) and deferred financing costs		234			(95	)		139			255			(102	)		153
Loan loss allowance		(193	)		(238	)		(431	)		(192	)		(232	)		(424	)
Carrying value — Net amortized cost	$	21,510		$	16,983		$	38,493		$	23,121		$	17,805		$	40,926

8

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

CMO Collateral — Loan Loss Allowance Activity

(Dollars in thousands)

	Three Months
	Ended
	March 31,
	2005		2004
Balance, beginning of period	$	424	$	407
Loan loss provision		7		10
Charge-offs		—		(12	)
Balance, end of period	$	431	$	405

5. Mortgage Securities — Estimated Fair Values

Mortgage Securities Pledged Under Repurchase Agreements

(Dollars in thousands)

	March 31,			December 31,
	2005			2004
Mortgage securities classified as available for sale
Principal balance	$	90,840		$	87,460
Net premium (discount)		(30,130	)		(32,519	)
Amortized cost		60,710			54,941
Gross unrealized gain		550			474
Gross unrealized loss		(928	)		(1,103	)
Estimated fair value	$	60,332		$	54,312
Mortgage securities classified as trading
Principal balance	$	92,597		$	98,098
Net premium (discount)		777			839
Amortized cost		93,374			98,937
Gross unrealized gain		530			1,215
Gross unrealized loss		(1,706	)		(1,010	)
Estimated fair value	$	92,198		$	99,142

9

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Mortgage Securities, Not Pledged

(Dollars in thousands)

	March 31,			December 31,
	2005			2004
Mortgage securities classified as available for sale
Principal balance	$	9,820		$	—
Net premium (discount)		(3,601	)		—
Amortized cost		6,219			—
Gross unrealized gain		—			—
Gross unrealized loss		(172	)		—
Estimated fair value	$	6,047		$	—
Mortgage securities classified as trading
Principal balance	$	10,602		$	10,949
Net premium (discount)		181			190
Amortized cost		10,783			11,139
Gross unrealized gain		—			—
Gross unrealized loss		(157	)		(13	)
Estimated fair value	$	10,626		$	11,126

All Mortgage Securities by Collateral Type

(Dollars in thousands)

	Available for Sale				Trading
	March 31,		December 31,		March 31,		December 31,
	2005		2004		2005		2004
Mortgage securities classified as
Fixed-Rate Agency Mortgage-Backed Securities	$	—	$	—	$	102,824	$	110,268
Fixed-Rate Subordinate Mortgage-Backed Securities		13,472		11,844		—		—
Adjustable-Rate Subordinate Mortgage-Backed Securities		52,907		42,468		—		—
Carrying value of mortgage securities	$	66,379	$	54,312	$	102,824	$	110,268

6. Notes Receivable from Related Parties

      As of March 31, 2005, Hanover had approximately $583,000 of loans outstanding to four of its executive officers (the “Principals”). The notes mature in September 2007. The loans to the Principals, recorded as a deduction from stockholders’ equity of as of March 31, 2005, are secured solely by an aggregate of 38,889 shares of Hanover’s common stock, owned by the Principals, and are otherwise non-recourse to the Principals.

      The $583,000 of loans outstanding could be forgiven and 72,223 shares of the Company’s common stock could be earned by, and subsequently transferred to, the Principals as of any July 1 between 2005 and 2007 if the return on the Company’s common stock meets or exceeds predefined conditions.

10

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

7. Repurchase Agreements and Other Liabilities

      Information pertaining to individual repurchase agreement lenders as of March 31, 2005 is as follows (dollars in thousands):

	Committed		December 31,					March 31,		Carrying Value
	Borrowing		2004		Net			2005		of Underlying
Lender	Limit		Balance		Change			Balance		Collateral		Type of Collateral
Lender A	$	20,000	$	21,771	$	(116	)	$	21,655	$	34,702	Retained CMO Securities, Mortgage Securities
Lender B				395		1,260			1,655		2,525	Mortgage Securities
Lender C				1,742		(1,742	)		—		—	Mortgage Securities
Lender D				99,076		(9,601	)		89,475		94,964	Mortgage Securities
Lender E				376		(7	)		369		622	Mortgage Securities
Lender F				1,181		8,399			9,580		14,159	Mortgage Securities
Lender G				524		(2	)		522		977	Mortgage Securities
Lender H				2,823		(895	)		1,928		2,964	Mortgage Securities
Lender I				2,214		27			2,241		3,478	Mortgage Securities
Total			$	130,102	$	(2,677	)	$	127,425	$	154,391

      As of March 31, 2005, the weighted-average borrowing rate on the Company’s repurchase agreements was 3.30%. The committed borrowing amount for Lender A, set to expire on April 25, 2005, has been extended until the lender can complete the renewal process. Management expects Lender A to renew the commitment for twelve months (see Note 12). All of the Company’s other repurchase borrowings are pursuant to uncommitted financing arrangements that are typically renewed monthly.

      HCP has a line of credit established with a major business finance organization for up to $2 million or 80% of HCP’s accounts receivable. The line is secured by the assets of HCP. The interest rate is applied daily to outstanding amounts based on the LIBOR rate plus 2.8%. At March 31, 2005, HCP’s borrowing rate was 5.66%.

8. Derivative Instruments

      Hanover uses certain derivative instruments to manage the risk of changes in market conditions that could affect the value of certain portfolio securities or adverse changes in floating interest rates of its debt instruments. Hanover’s derivatives are classified as freestanding with income realized from settlements and changes in valuation of contracts included in income. Derivative instruments are included as a component of other assets and carried at fair value based on estimates using market prices.

      Hanover uses forward sales contracts to provide protection against adverse changes in the market value of its Agency mortgage-backed securities. Hanover also uses interest rate caps to provide protection against increases in floating interest rates on financing liabilities, primarily repurchase agreements, and to some extent CMOs.

      As of March 31, 2005, the fair value of Hanover’s interest rate caps was approximately $107,000 and the fair value of forward sales contracts was approximately $996,000.

11

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Components of Income From Freestanding Derivatives

(Dollars in thousands)

	Three Months
	Ended
	March 31,
	2005			2004
Loss on cash settlements	$	(279	)	$	(1,064	)
Mark-to-market gains on forward contracts		981			164
Mark-to-market gains (losses) on interest rate caps		6			(166	)
Net gain (loss) on freestanding derivatives	$	708		$	(1,066	)

9. Liability to subsidiary trust issuing preferred securities

      During March of 2005, Hanover Statutory Trust I (“the Trust”) sold, in a private placement, trust preferred securities for an aggregate amount of $20 million. Hanover owns all of the common stock of the Trust. The Trust used the proceeds to purchase Hanover junior subordinated notes due March 2035, which represent all of the Trust’s assets. The terms of the junior subordinated notes are substantially the same as the terms of the trust preferred securities. The trust preferred securities have a fixed interest rate of 8.51% per annum during the first five years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 4.25% per annum.

      Under the provisions of the FASB issued revision to FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46(R)”), Hanover determined that the holders of the trust preferred securities were the primary beneficiaries of the Trust. As a result, Hanover cannot consolidate the Trust and has reflected the obligation to the Trust under the caption “liability to subsidiary trust issuing preferred securities” and will account for the investment in the common stock of the Trust on the equity method of accounting.

      Hanover may redeem the notes, in whole or in part, for cash, at par, after March 30, 2010. To the extent Hanover redeems notes the Trust is required to redeem a corresponding amount of trust preferred securities.

      The ability of the Trust to pay dividends depends on the receipt of interest payments on the notes. Hanover has the right, pursuant to certain qualifications and covenants, to defer payments of interest on the notes for up to four consecutive quarters. If payment of interest on the notes is deferred, the Trust will defer the quarterly distributions on the trust preferred securities for a corresponding period. Additional interest accrues on deferred payments at the annual rate payable on the notes, compounded quarterly.

Summary

Trust Preferred Securities Outstanding as of March 31, 2005	$20 million
Interest Rate as of March 31, 2005	8.51%
Redemption period at Hanover’s option	After March 30, 2010
Maturity date	March 30, 2035

12

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

10. Supplemental Disclosures for Statements of Cash Flows (dollars in thousands, except share data)

			Three Months
			Ended
			March 31,
			2005		2004
Supplemental disclosures of cash flow information
	Cash paid during the period for:
		Income taxes	$	15	$	281
		Interest	$	1,476	$	827
Supplemental schedule of non-cash activities
	35,419 shares of common stock paid for acquisition		$	—	$	493

11. Segment Reporting

      The Company’s three principal business segments are each conducted through its three primary operating companies, Hanover, HCP, and HT. Segment information is prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States. HCP and HT rely on Hanover for financing portions of their operations. Intercompany transactions are recorded on an arms-length basis. All significant intercompany accounts and transactions are eliminated in consolidation. However, interest on any intercompany notes from HCP and HT to Hanover is determined on an incremental cost basis that may be less than HCP and HT would pay to independent third parties.

      The principal business of Hanover is earning interest and income on leveraged investments in subordinated mortgage-backed securities and, to a lesser extent, mortgage-loans. The principal business of HCP is to generate income from services provided to the mortgage industry in the form of consulting, loan sale advisory services, loan file due diligence reviews, staffing solutions, and mortgage assignment and collateral rectification services. The principal business of HT is generating income from loan sale advisory services, traditional loan brokerage services, technology solutions, and valuation services. HT also brokers loan pools, mortgage-servicing rights, and other mortgage related assets through an Internet-based exchange. The Company’s businesses are all conducted within the United States.

13

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

			Three Months Ended March 31, 2005 (Dollars in thousands)
			Hanover Capital
			Mortgage			Hanover Capital
			Holdings, Inc.			Partners Ltd.			HanoverTrade, Inc.			Eliminations			Consolidated
Revenues
	Interest income		$	3,969		$	3		$	—		$	(140	)	$	3,832
	Interest expense			1,572			9			131			(140	)		1,572
		Net interest income		2,397			(6	)		(131	)		—			2,260
	Loan loss provision			7			—			—			—			7
		Net interest income after loan loss provision		2,390			(6	)		(131	)		—			2,253
	Gain on sale of mortgage assets			2,280			—			—			—			2,280
	Loss on mark to market of mortgage assets			(1,628	)		—			—			—			(1,628	)
	Gain (loss) on freestanding derivatives			708			—			—			—			708
	Due diligence fees			—			1,993			—			—			1,993
	Assignment fees			—			549			—						549
	Technology			—			—			554			—			554
	Loan brokering and advisory services			—			2			512			(2	)		512
	Reimbursed out-of-pocket expenses			—			458			5			—			463
	Other income			—			27			73			(44	)		56
		Total revenues		3,750			3,023			1,013			(46	)		7,740
Total expenses				1,536			3,135			1,699			(46	)		6,324
		Operating income		2,214			(112	)		(686	)		—			1,416
Equity in (loss) income of unconsolidated affiliates				(96	)		—			—						(96	)
Income before income tax provision (benefit)				2,118			(112	)		(686	)		—			1,320
Income tax provision (benefit)				—			(43	)		—			—			(43	)
Net income			$	2,118		$	(69	)	$	(686	)	$	—		$	1,363

14

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

			Three Months Ended March 31, 2004 (Dollars in thousands)
			Hanover Capital
			Mortgage			Hanover Capital
			Holdings, Inc.			Partners Ltd.			HanoverTrade, Inc.			Eliminations			Consolidated
Revenues
	Interest income		$	3,184		$	2		$	—		$	(84	)	$	3,102
	Interest expense			820			17			67			(84	)		820
		Net interest income		2,364			(15	)		(67	)		—			2,282
	Loan loss provision			10			—			—			—			10
		Net interest income after loan loss provision		2,354			(15	)		(67	)		—			2,272
	Gain on sale of mortgage assets			3,458			—			—			—			3,458
	Loss on mark to market of mortgage assets			(57	)		—			—			—			(57	)
	Gain (loss) on freestanding derivatives			(1,066	)		—			—			—			(1,066	)
	Due diligence fees			—			1,380			—			—			1,380
	Assignment fees			—			585			—			—			585
	Technology			—			—			388			—			388
	Loan brokering and advisory services			—			—			491			—			491
	Reimbursed out-of-pocket expenses			—			343			—			—			343
	Other income			27			7			68			(11	)		91
		Total revenues		4,716			2,300			880			(11	)		7,885
Total expenses				1,326			2,559			1,573			(11	)		5,447
		Operating income		3,390			(259	)		(693	)		—			2,438
Equity in (loss) income of unconsolidated affiliates				24			—			—			—			24
Income before income tax provision (benefit)				3,414			(259	)		(693	)		—			2,462
Income tax provision (benefit)				—			(83	)		—			—			(83	)
Net income			$	3,414		$	(176	)	$	(693	)	$	—		$	2,545

12. Subsequent Events

      On May 13, 2005, Hanover received notice from the lender of its $20 million committed borrowing that the term of such borrowing would be extended to May 15, 2006 (see Note 7).

      The Board of Directors declared a first quarter dividend of $0.30 per share on May 13, 2005, to be paid on June 6, 2005, to stockholders of record as of May 27, 2005.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

      Certain statements in this report, including, without limitation, matters discussed under this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be read in conjunction with the financial statements, related notes, and other detailed information included elsewhere in this Quarterly Report on Form 10-Q. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in Items 1, 7 and 7A of our Annual Report on Form 10-K for the year ended December 31, 2004 and in our other securities filings with the Securities and Exchange Commission. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties. The forward-looking statements contained in this report are made only as of the date hereof. We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

      We are a specialty finance company qualified as a real estate investment trust, which we refer to as a “REIT”. Accordingly, we generally distribute substantially all of our earnings to stockholders without paying Federal or state income tax at the corporate level on the distributed earnings. We seek to generate consistent income from our investments and business activities and provide steady dividends to our shareholders by investing primarily in the domestic residential mortgage market. We have three principal business segments that service the domestic residential mortgage market:

•  Hanover Capital Mortgage Holdings, Inc., which we refer to as “Hanover”, has as its primary business objective the generation of interest income from a leveraged investment portfolio, consisting of subordinate mortgage-backed securities, which we refer to as “Subordinate MBS”, loans that collateralize mortgage-backed securities, which we refer to as “Mortgage Loans”, and whole pool Fannie Mae and Freddie Mac mortgage-backed securities, which together we refer to as “Agency MBS”. Hanover also has an investment in HDMF-I LLC, an entity that invests in distressed mortgage loans and real estate.

•  Hanover Capital Partners Ltd., which we refer to as “HCP”, provides consulting and outsourcing services, which we refer to as “COS”, for third parties in the mortgage industry.

•  HanoverTrade, Inc., which we refer to as “HT”, provides loan sale advisory services, which we refer to as “LSA”, and technology software for third parties in the mortgage industry.

For the three months ended March 31, 2005, we reported net income of $1.4 million, or $0.16 diluted earnings per share, as compared to $2.5 million, or $0.31 diluted earnings per share, in the same period in 2004. Our earnings were driven largely by the income generated by our mortgage investment portfolio. The size of this portfolio increased to $207.7 million as of March 31, 2005 from $146.7 million as of March 31, 2004.

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Investment Portfolio

      Our principal business is to invest in Subordinate MBS and Mortgage Loans. We also maintain a portfolio of whole pool Agency MBS to satisfy certain Investment Company Act of 1940 requirements.

      The table below describes the principal assets of our investment portfolio as of March 31, 2005 (dollars in thousands):

	Carrying				Net
Portfolio(1)	Value		Financing		Equity(2)
Mortgage Loans(3)	$	38,493	$	34,120	$	4,373
Subordinate MBS		66,379		38,669		27,710
Agency MBS		102,824		87,491		15,333
Total	$	207,696	$	160,280	$	47,416

(1)	Our Subordinate MBS portfolio is classified in our Consolidated Balance Sheets as “Mortgage securities pledged under repurchase agreements Available for sale” and “Mortgage securities, not pledged Available for sale”. Our Mortgage Loans portfolio is classified on our Consolidated Balance Sheets as “Mortgage loans CMO Collateral.” Our Agency MBS portfolio is classified on our Consolidated Balance Sheets as “Mortgage securities pledged under repurchase agreements Trading” and “Mortgage securities, not pledged Trading”.
(2)	Net equity is the difference between the carrying value of an asset and the amount of financing specific to that asset.
(3)	Additionally, we own two mortgage loans classified in our balance sheet as “Mortgage loans Held for sale” with an aggregate asset value of $0.2 million as of March 31, 2005.

      Our Subordinate MBS portfolio is comprised of non-investment grade securities that represent retained interests that are subordinate to other classes of the same series of mortgage-backed securities in the right to receive payments from the underlying mortgage loans. These securities are backed by prime quality domestic residential mortgage loans issued and serviced by large mortgage originators. Our Subordinate MBS portfolio is comprised of both adjustable- and fixed-rate securities. These securities are financed under agreements where we have sold securities with a commitment to repurchase these securities at a later date, commonly referred to as “Repurchase Agreements”. Our Repurchase Agreements are both committed and uncommitted and re-price monthly based on the one-month London Interbank Offered Rate Index, or “LIBOR” index. LIBOR is an average of the interest rates that major international banks charge each other to borrow U.S. dollars in the London money market.

      The investment objective for our Subordinate MBS portfolio is to generate interest income and, when appropriate, gain on sale through credit risk management combined with leverage, which incurs some interest rate risk. Credit risk management is accomplished by pre-purchase and ongoing collateral analysis coupled with a pro-active disposition strategy. As of March 31, 2005, our Subordinate MBS portfolio has financing of $38.7 million and net equity of $27.7 million for a debt to equity ratio of 1.40 to 1.00.

      The investment objective for our Mortgage Loan portfolio is to generate interest income through credit risk and interest rate risk management. As of March 31, 2005, our Mortgage Loan portfolio consists of mortgage loans that collateralize two debt securitizations. Both securitizations are financing transactions where we sold senior bonds and retained certain subordinate bonds. The Mortgage Loans are classified as assets in our Consolidated Balance Sheets and generate interest income. The senior bonds we sold are classified as liabilities in our Consolidated Balance Sheets as collateralized mortgage obligations (CMOs) and generate interest expense. The difference between this interest income and expense is the net interest income we earn on our Mortgage Loan portfolio.

      We maintain an Agency MBS portfolio to satisfy Investment Company Act of 1940 requirements. Our Agency MBS portfolio is comprised of whole pool fixed-rate Fannie Mae and Freddie Mac guaranteed mortgage-backed securities that we economically hedge via forward sales of like-coupon

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Agency MBS. We finance most of our Agency MBS portfolio with Repurchase Agreements, which re-price monthly based on the one-month LIBOR index. To the extent that we increase our Mortgage Loan portfolio, we would anticipate our Agency MBS portfolio to decline as the Mortgage Loan portfolio fulfills the Investment Company Act of 1940 requirements currently met by the Agency MBS portfolio.

      Generally we invest in securities that are the first to absorb credit losses. Our income will be affected both by the change in fair value of our securities and by credit losses. Changes in both the fair value and the credit losses are caused by increased delinquency and foreclosure rates in the residential mortgage market and reductions in housing values. In general, delinquency and foreclosure rates are correlated with local area employment rates and loss severities are associated with regional housing price trends.

      The future direction of unemployment, home prices and interest rates is uncertain and is expected to have a material affect on the performance of our investment portfolio. Historically each of these macroeconomic factors has been cyclical. Unemployment has been relatively low, which has led to relatively low delinquencies and defaults on mortgage loans. A decline of economic growth or a return to recession could result in increased delinquencies and defaults. In addition, home prices have increased over the past five years at a rate above the historical long-term trend. Declining home prices could lead to increased loss severity on defaulted mortgage loans. Moreover, short-term interest rates declined to recent low levels in 2004 and began to increase thereafter. Further increases in short-term interest rates will increase our cost of funds and reduce the net interest income on our portfolio.

      Our exposure to adverse macroeconomic trends is mitigated by our active credit risk management and our strategy of targeting (a) high credit score borrowers, who are less likely to default in an economic downturn, and (b) loans with low loan-to-value ratios, which are less likely to suffer losses due to declining home prices. In addition, our shift to adjustable-rate Subordinate MBS and our purchase of interest rate caps reduce the risk of declining net interest income caused by rising interest rates.

      Opportunities for HDMF-I LLC to acquire loans at attractive prices and yields could arise should the number of defaulted mortgage loans increase and home prices decline.

Consulting and Outsourcing Services (COS)

      Through our COS operations we provide services to commercial banks, mortgage banks, government agencies, credit unions and insurance companies. Our services include: conduit support services including loan due diligence (credit and compliance) on a full range of mortgage products; quality control reviews of newly originated mortgage loans; operational reviews of loan origination and servicing operations; mortgage assignment services; loan collateral reviews; loan document rectification; and temporary staffing services.

      Our COS revenue is driven by our ability to generate opportunities from new clients and by continuing to provide existing clients with needed services. Our business objective is to work closely with a specifically targeted group of clients so that we may tailor our services to meet their specific outsourcing and consulting needs. To that end, we have created an on-site fulfillment center in order to provide our clients with regularly scheduled pre-and post-closing loan services. Those clients that have utilized our fulfillment center have provided us with longer-term revenue streams. The market for COS services is affected by industry trends such as the volume of loan originations and the pace of consolidation in the mortgage industry.

Loan Sale Advisory (LSA) and Technology Solutions

      Our LSA operations earn fees by providing brokerage, asset valuation and consulting services. Our brokerage service integrates varying degrees of traditional voice brokerage conducted primarily by telephone, web-enhanced brokerage and on-line auction hosting. We also perform market price valuations for a variety of loan products and offer consulting advice on loan product pricing and business strategies.

      We earn licensing and related professional fees by licensing our proprietary software applications to the financial industry. We market web-based technology solutions to meet specific needs of the mortgage industry in the secure transmission, analysis, valuation, tracking and stratification of loan portfolios. The

18

software technology is licensed to government agencies and financial institutions that originate and/or trade financial assets. We also use the applications to provide servicing rights valuations to clients who do not license our software.

      The market for LSA and technology solutions is affected by industry trends such as the volume of loan originations and the pace of consolidation in the mortgage industry.

Dividend Policy

      Hanover operates as a REIT and is required to pay dividends equal to at least 90% of its REIT taxable income. The current policy of our Board of Directors is to annually pay four quarterly dividends based on management’s estimate of Hanover’s GAAP income and REIT taxable income in order to pay the greater of GAAP income or 90% of REIT taxable income. Hanover’s REIT taxable income is primarily generated by its leveraged investment portfolio of Subordinate MBS and CMOs. Hanover’s per share dividend rate is determined in the first quarter of each taxable year and, in general, would be the amount expected to be paid for each of the four quarters of the taxable year. To the extent that our GAAP income exceed this rate, a special dividend would be considered after the close of the taxable year. In all cases, the required 90% of REIT taxable income would be paid under our current policy.

Critical Accounting Policies

      Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that can affect the reported amounts of assets, liabilities (including contingencies), revenues and expenses as well as related disclosures. These estimates are based on available internal and market information and appropriate valuation methodologies believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the expected useful lives and carrying values of assets and liabilities which can materially affect the determination of net income and book value per common share. Actual results may differ from these estimates.

      Management believes the following are critical accounting policies in the preparation of our consolidated financial statements that involve the use of estimates requiring considerable judgment.

      Mortgage Securities — Our mortgage securities are designated as available for sale, trading, or held to maturity.

•  Mortgage securities designated as available for sale are recorded at estimated fair value on the balance sheet with unrealized gains and losses recorded in stockholders’ equity as a component of “Accumulated other comprehensive income”. As such, these unrealized gains and losses enter into the calculation of book value per common share.

•  Mortgage securities designated as trading are reported at estimated fair value. Gains and losses resulting from changes in fair value are recorded as income or expense in the income statement.

•  Mortgage securities classified as held to maturity are carried at amortized cost with the amortization of premiums or accretions of discounts included as a component of interest income in the income statement. If a decline in value is deemed other-than-temporary, the carrying value is reduced and the amounts recorded as unrealized losses in the income statement.

      Hanover’s assets are not generally traded on a national securities exchange or national automated quotation system and as a result prices may not be readily ascertainable. To overcome this void Hanover uses complex cash flow modeling in determining estimated fair value. Considerable judgment is required when interpreting market data to develop estimated fair values, particularly in circumstances of deteriorating credit quality and market liquidity. Several of the assumptions used by management are confirmed by independent third parties on at least a quarterly basis. In determining fair value, future cash

19

flows are based on estimates of prepayments, the impact of interest rate movements on yields, delinquency of the underlying loans and estimated probable losses based on historical experience and estimates of expected future performance. Assumptions are reviewed in light of market expectations adjusted by Hanover’s experience. To the extent that management’s assumptions do not reflect market expectations, the value of the portfolio may be adversely impacted.

      Revenue Recognition — Revenue from services performed under due diligence contracts in progress and long-term technology consulting contracts is recognized on an as-earned basis. To calculate the percentage of a contract earned, management must make estimates. As the majority of these revenues relate to services performed, such estimates may include the amount of time spent by individuals in relation to the aggregate amount of time required to complete the contract, the evaluation of both quantitative and qualitative criteria as agreed to and maintained in the contract and possibly regulations set forth in the contract if such contract is with an agency of the Federal government.

      We recognize revenue from loan brokering and advisory services when transactions fund which is the time fees are earned.

Results of Operations

      The following table presents our unaudited consolidated results of operations for the three months ended March 31, 2005 and 2004 (dollars in thousands, except per share data):

		Three Months Ended
		March 31,
		2005			2004
Net interest income		$	2,260		$	2,282
Loan loss provision			(7	)		(10	)
Gain on sale of mortgage assets			2,280			3,458
Loss on mark to market of mortgage assets			(1,628	)		(57	)
Gain (loss) on freestanding derivatives			708			(1,066	)
Due diligence fees			1,993			1,380
Assignment fees			549			585
Technology			554			388
Loan brokering and advisory services			512			491
Reimbursed out-of-pocket expenses			463			343
Other income			56			91
	Total revenues		7,740			7,885
	Total expenses		6,324			5,447
	Operating income		1,416			2,438
Equity in (loss) income of unconsolidated affiliates			(96	)		24
Income before income tax provision (benefit)			1,320			2,462
Income tax provision (benefit)			(43	)		(83	)
Net income		$	1,363		$	2,545
Basic earnings per share		$	0.16		$	0.31
Diluted earnings per share		$	0.16		$	0.31

Quarterly Highlights

      We recorded net income for the three months ended March 31, 2005 of $1.4 million, or $0.16 per share, based on 8,408,335 diluted weighted-average common shares outstanding compared to net income of

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$2.5 million, or $0.31 per share, based on 8,287,045 diluted weighted-average common shares outstanding for the same period in 2004. Net income for the three months ended March 31, 2005 decreased $1.1 million from the same period in 2004 primarily due to an increase in total of expenses of $0.9 million for the three months ended March 31, 2005 as compared to the same period in 2004. This increase in legal and professional, technology and other (including insurance and financing expenses) is more fully described under the section entitled “Operating Expenses” below. Total revenues for the three months ended March 31, 2005 were $7.8 million compared to $7.9 million previously reported for the same period in 2004.

      The Board of Directors declared a first quarter dividend of $0.30 per share on May 13, 2005 to be paid on June 6, 2005 to stockholders of record as of May 27, 2005.

Net Interest Income and Total Gains (Losses) For Interest Earning Assets

Investment Portfolio

Net Interest Income

      The following table provides details of net interest income for interest earning assets (dollars in thousands):

		Three Months Ended
		March 31,
		2005			2004
Mortgage Loans:
	Held for sale	$	2		$	14
	Collateral for CMOs		120			269
Subordinate MBS			1,414			1,584
Agency MBS			726			334
Other			(2	)		81
Net interest income		$	2,260		$	2,282

      The investment portfolio’s net interest income remained constant at $2.3 million for each of the three months ended March 31, 2005 and March 31, 2004. The increase in the net interest income in the Agency MBS portfolio to $0.7 million for the three months ended March 31, 2005 from $0.3 million for the same period in 2004 primarily resulted from an increase in the size of the portfolio. The increase in the size of the Agency MBS portfolio was intended to satisfy certain REIT related asset requirements. Net interest income in the Mortgage Loan portfolio declined $0.2 million during the three months ended March 31, 2005 as compared to the same period in 2004 as a result of scheduled and unscheduled principal payments that reduced the underlying mortgage loan balances. Net interest income in the Subordinate MBS portfolio declined $0.2 million during the three months ended March 31, 2005 as compared to the same period in 2004 primarily as a result of increased financing costs.

Total Gains (Losses)

      The following table provides details of total gains (losses) as follows (dollars in thousands):

	Three Months Ended
	March 31,
	2005			2004
Gain on sale of mortgage assets	$	2,280		$	3,458
Loss on mark to market of mortgage assets		(1,628	)		(57	)
Gain (loss) on freestanding derivatives		708			(1,066	)
Total gains	$	1,360		$	2,335

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      Gain on sale of mortgage assets decreased $1.2 million for the three months ended March 31, 2005 as compared to the same period in 2004 primarily due to an increase in interest rates and an increase in the average cost basis of the assets sold.

      Losses on mark to market of mortgage assets increased $1.6 million for the three months ended March 31, 2005 as compared to the same period in 2004 primarily as a result of a decline in the carrying value of the Agency MBS portfolio.

      Gain on freestanding derivatives (which primarily relates to the economic hedge on the Agency MBS portfolio) increased $1.8 million for the three months ended March 31, 2005 as compared to the same period in 2004 primarily as a result of decreased expenses associated with economically hedging the Agency MBS portfolio.

Mortgage Loans

      The following table provides details of the net interest income generated on the Mortgage Loan portfolio (dollars in thousands):

	Three Months
	Ended
	March 31,
	2005			2004
Interest income	$	630		$	882
Interest expense		(496	)		(603	)
Interest expense — Repurchase Agreements		(14	)		(10	)
Net interest income	$	120		$	269

      Our Mortgage Loan portfolio net interest income declined to $0.1 million for the three months ended March 31, 2005 from $0.3 million for the same period in 2004. This decline in net interest income is due to the declining principal balance of our Mortgage Loan portfolio due to scheduled and unscheduled principal payments which reduced the underlying mortgage loan balances and, to a lesser extent, due to the rise in the interest expense related to one-month LIBOR indexed securities sold in our 1999-B securitization.

Subordinate MBS

      The following table provides details of the net interest income generated on the Subordinate MBS portfolio (dollars in thousands):

	Three Months
	Ended
	March 31,
	2005			2004
Interest income	$	1,794		$	1,687
Interest expense — Repurchase Agreements		(380	)		(103	)
Net interest income	$	1,414		$	1,584

      The Subordinate MBS portfolio’s net interest income decreased to $1.4 million for the three months ended March 31, 2005 from $1.6 million for the same period in 2004. This decrease in revenues was primarily attributable to the increase in financing costs.

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Agency MBS

      The following table provides details of the net interest income generated on the Agency MBS portfolio (dollars in thousands):

	Three Months
	Ended
	March 31,
	2005			2004
Interest income	$	1,335		$	439
Interest expense — Repurchase Agreements		(609	)		(105	)
Net interest income	$	726		$	334

      The Agency MBS portfolio’s net interest income increased to $0.7 million for the three months ended March 31, 2005 from $0.3 million for the same period in 2004. The increase is primarily due to the increase in the size of the Agency MBS portfolio.

      We attempt to fully economically hedge our Agency MBS portfolio to potentially offset any gains or losses in our portfolio with losses or gains from our forward sales of like-kind Agency MBS.

      Earnings on our Agency MBS portfolio consist of net interest income and gains or losses on mark to market of the Agency MBS. However, these earnings are substantially economically offset by gains or losses from forward sales of like-coupon Agency MBS.

      The table below reflects the net economic impact of our Agency MBS portfolio for the three months ended March 31, 2005 (dollars in thousands):

Net interest income	$	726
Loss on mark to market of mortgage assets		(1,525	)
Other gain (forward sales)		703
Total	$	(96	)

      We believe that the net economic impact of our Agency MBS portfolio provides useful information to investors because it provides information not readily apparent from our Consolidated Statements of Income.

COS Revenues

      For the three months ended March 31, 2005, each of due diligence fees and assignment fees increased from the same period in 2004. Due diligence fees increased to $2.0 million for the three months ended March 31, 2005 from $1.4 million for the same period in 2004 and assignment fees decreased to $0.5 million for the three months ended March 31, 2005 from $0.6 million for the same period in 2004.

      The increase in due diligence fees for the three months ended March 31, 2005 is attributed mainly to increased revenues from our conduit support services, which includes loan due diligence.

Technology

      For the three months ended March 31, 2005 revenues generated by technology services were $0.6 million as compared to $0.4 million for the same period in 2004. The increase in technology services for the three months ended March 31, 2005 is attributed mainly to an increase in license fees from deployment of our technology to a large mortgage banker.

Loan brokering and advisory services

      For the three months ended March 31, 2005, revenues generated from loan brokering and advisory services remained unchanged from the same period in 2004 at $0.5 million.

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Operating Expenses

      The following table sets forth the increase (decrease) in operating expenses for the three months ended March 31, 2005 as compared to the same period in March 31, 2004 (dollars in thousands):

		Three Months Ended
		March 31,
						Increase/
		2005		2004		(Decrease)
Personnel		$	2,260	$	2,304	$	(44	)
Subcontractors			1,181		1,050		131
Legal and professional			920		587		333
General and administrative			388		447		(59	)
Depreciation and amortization			281		216		65
Occupancy			135		117		18
Technology			295		97		198
Travel and entertainment			102		141		(39	)
Out-of-pocket expenses reimbursed			463		343		120
Other			299		145		154
	Total expenses	$	6,324	$	5,447	$	877

      Operating expenses for the three months ended March 31, 2005 of $6.3 million were higher than the $5.4 million for the same period in 2004 by $0.9 million. The major changes within operating expenses were in legal and professional, technology, other (including insurance and financing fees), out-of-pocket expenses and subcontractors.

      The increase in legal and professional fees to $0.9 million for the quarter ended March 31, 2005 from $0.6 million for the same quarter in 2004 was primarily attributable to fees incurred with our independent auditors in connection with the audit of our financial statements and compliance with Section 404 of Sarbanes-Oxley Act of 2002. We expect that our legal and professional expenses will continue to be somewhat higher as a result of the continued costs of compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

      The increase in technology expense to $0.3 million for the quarter ended March 31, 2005 compared to $0.1 million for the same quarter in 2004 was primarily due to fees associated with the deployment of our software, third-party hosting fees and third-party license fees.

      The increase in other fees to $0.3 million for the quarter ended March 31, 2005 compared to $0.1 million for the same quarter in 2004 was primarily attributable to the fact that we increased our committed line of credit and increased our directors and officers insurance.

      Subcontractors expenses rose to $1.2 million for the three months ended March 31, 2005 as compared to $1.1 million for the same period in 2004, and out-of-pocket expenses rose to $0.5 million for the three months ended March 31, 2005 as compared to $0.3 million for the same period in 2004. The increase in each of these expense items was attributable to the increase in conduit support services provided.

Credit Performance

      Hanover’s primary risk in its investment portfolio is credit risk on the loans that underlie the Subordinate MBS portfolio. These loans are all prime residential loans. As of March 31, 2005, the total portfolio of loans underlying the Subordinate MBS portfolio consisted of 26,856 loans with a total principal balance of $12.7 billion. Total losses for the quarter ended March 31, 2005 on our portfolio were negligible. As of March 31, 2005, loans 90 or more days past due totaled 0.01% of our portfolio, with 0.00% in foreclosure or that have become real estate owned.

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Liquidity and Capital Resources

      We expect to meet our future short-term and longer-term liquidity requirements generally from our existing working capital, cash flow provided by operations, Repurchase Agreements and other possible sources of longer-term financing. We consider our ability to generate cash to be adequate to meet operating requirements both in the short-term and the longer-term. However, we have exposure to market-driven liquidity events due to our use of short-term financing. If a significant decline in the market value of our investment portfolio should occur, our available liquidity from existing sources and ability to access additional sources of credit could be reduced. As a result of such a reduction in liquidity, we may be forced to sell certain investments. If required, these sales could be made at prices lower than the carrying value of such assets, which could result in losses. As of March 31, 2005, we had a $20 million committed repurchase line of credit, which was fully utilized. In addition, as of March 31, 2005, we had nine uncommitted lines of credit. We may seek to establish additional committed and uncommitted lines of credit in the future. We cannot assure that we will be successful in obtaining such additional financing on favorable terms, if at all.

      Traditional cash flow analysis may not be applicable for us as we have significant cash flow variability due to our investment activities in various balance sheet categories. Our primary non-discretionary cash uses are our operating costs, pay-down of CMO debt and dividend payments. Our repayment of CMO debt amounted to $2.3 million for the three months ended March 31, 2005 as compared to $4.7 million for the same period in 2004. Our principal payments received on our CMO collateral were $2.4 million for the three months ended March 31, 2005 as compared to $4.8 million for the same period in 2004. Our dividend payments are generally covered by our net income. Our cash and cash equivalents as of March 31, 2005, increased by $12.1 million at December 31, 2004 primarily as a result of the closing on March 15, 2005 of a private placement of $20 million of trust preferred securities through Hanover Statutory Trust I, which we refer to as the “Trust”, a statutory trust formed by us for that purpose. In connection with the private placement, the Trust used the proceeds from the offering and other cash to purchase $20,619,000 of our junior subordinated notes due 2035.

      The trust preferred securities and the junior subordinated notes mature in 30 years and are redeemable in whole or in part, without penalty, at our option after five years. Both the trust preferred securities and the junior subordinated notes require quarterly distributions and bear a fixed interest rate of 8.51% per annum for the first five years, after which the interest rate will reset quarterly at the prevailing three-month LIBOR rate plus 4.25% per annum.

      In addition to the trust preferred securities transaction described above, we intend to access the capital markets in 2005 to raise additional capital. Any new capital raised will be used primarily to invest in our portfolio.

      We have no current commitments for any material capital expenditures. We primarily invest our available capital in our investment portfolio. We have invested a limited amount of our capital in the development of our software products, but have no future commitments to invest further in this area. As a REIT, we are required to pay dividends equal to 90% of our taxable income and therefore must depend on raising new sources of capital for growth.

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Taxable Income

      Our taxable income for the three months ended March 31, 2005 is estimated at $3.0 million. Taxable income differs from net income because of timing differences (refers to the period in which elements of net income that can be included in taxable income) and permanent differences (refers to an element of net income that must be included or excluded from taxable income). The following table reconciles net income to estimated taxable income at March 31, 2005 (dollars in thousands):

Net Income		$	1,363
	Add (deduct) differences
	Loss on mark to market of mortgage assets		1,628
	Gain on freestanding derivatives		(708	)
	Loan loss provision — net		7
	Losses in consolidated subsidiaries (not consolidated for tax purposes)		755
	Bonuses expensed not yet paid		62
	Other		(76	)
Estimated taxable income		$	3,031

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative Disclosure about Market Risk

      We believe our quantitative risk has not materially changed from our disclosures under Quantitative and Qualitative Disclosure About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2004.

Qualitative Disclosure about Market Risk

      Our primary investments are our Mortgage Loan, Subordinate MBS and Agency MBS portfolios. We divide “Market Risk” into: credit, interest rate, market value and prepayment. Within each of these risk areas, we seek to maintain a risk management process to protect the Company’s assets and maintain the dividend policy.

Credit Risk

      We believe the principal risk to our investment strategy is the credit performance of the domestic residential mortgage market. We employ a combination of pre-purchase due diligence, ongoing surveillance, internal and third party risk analysis models and a pro-active disposition strategy to manage credit risk. Additionally, we continually assess exogenous economic factors including housing prices and unemployment trends, on both national and regional levels. For the three months ended March 31, 2005, we experienced credit losses of less than $50 on our investments. However, there can be no guarantee that our favorable historical experience is predictive of future credit trends or actual results.

      Increased credit risk manifests itself through a combination of increasing mortgage loan delinquencies and decreasing housing prices. Over the past several years, the domestic residential housing market has experienced rapid and sustained housing price gains. Should housing prices decline, we believe our investments would be subject to increased risk of credit losses. Also over the past several years, mortgage loan delinquencies have been at historically low levels and a rise in delinquency rates would increase our risk of credit losses.

      Additionally, mortgage lenders increasingly have been originating and securitizing new loan types such as interest-only, negative amortization and payment option loans. The lack of historical data on these loan types increases the uncertainty with respect to investments in these mortgages. The increased percentage of

26

adjustable-rate, as opposed to fixed-rate, mortgage loans may have increased the credit risk profile of the residential mortgage market.

Mortgage Loan Portfolio

      We have leveraged credit risk in our Mortgage Loan portfolio as we issued CMO debt and retained the lower-rated bond classes. As with our Subordinate MBS portfolio, pre-purchase due diligence and ongoing surveillance is performed. Our Mortgage Loan portfolio is classified as held for investment. To the extent the individual mortgage loans are in a CMO, we are not able to selectively sell these mortgage loans. A loan loss allowance has been established for our Mortgage Loan portfolio and is reviewed on a monthly basis.

Subordinate MBS Portfolio

      We have leveraged credit risk in our Subordinate MBS portfolio through investments in the non-investment grade classes of securities, which are collateralized by high-quality, jumbo residential mortgage loans. These classes are the first to be impacted by losses on the underlying mortgage loans as their par values are written down by losses before higher-rated classes. Effectively, we are the guarantor of the higher-rated bonds, to the extent of the carrying value on the Subordinate MBS portfolio. On occasion, we will purchase subordinate bonds without owning the corresponding lower-rated class(es).

      We manage credit risk through detailed investment analysis both before purchasing subordinate securities and on an ongoing basis. Before subordinate securities are purchased we analyze the collateral using both internally developed and third party analytics, review deal structures and issuance documentation, review the servicer for acceptability and verify that the bonds are modeled on a widely used valuation system. Updated loan level collateral files are received on a monthly basis and are analyzed for favorable and unfavorable credit performance and trends. Bonds that do not meet our credit criteria may be sold via an arms-length competitive bidding process.

      Expected credit losses are established by analyzing each subordinate security and are designated as a portion of the difference between the par value and amortized cost of the security. Expected credit losses, including both timing and severity, are updated on a monthly basis based upon current collateral data.

Agency MBS Portfolio

      The securities held in our Agency MBS portfolio are guaranteed by Fannie Mae or Freddie Mac. As these are United States government-sponsored entities, we deem it unnecessary to take credit reserves on these securities.

Interest Rate Risk

      To the extent that our investments are financed with liabilities that re-price with different frequencies or benchmark indices, we are exposed to volatility in our net interest income.

Mortgage Loan Portfolio

      Our Mortgage Loan portfolio has two outstanding CMOs, 1999-A and 1999-B, and a securitization 2000-A that is collateralized by certificates from 1999-A and 1999-B.

      In the 1999-A CMO, the Mortgage Loans were match funded for both maturity and coupon rate via the issuance of term CMO debt where we retained only the subordinate certificates.

      In the 1999-B CMO, the Mortgage Loans were match funded on a maturity basis with one-month LIBOR indexed floating rate CMO debt where we retained only the subordinate certificates. The Mortgage Loans for 1999-B are a mixture of both fixed-rate and adjustable-rate loans with the subordinate certificates receiving the difference between the net coupon on the loans and the CMO debt coupon rate, known as spread. To protect the spread we own a cap on one-month LIBOR with a strike rate of 5% and

27

maturity date of October 2006. The notional amount of the cap is $23.5 million until October 2005 and $20 million until October 2006.

      The retained subordinate certificates from our 1999-A and 1999-B CMOs constitute the collateral for our 2000-A CMO. The 2000-A securitization consists of two groups of certificates, one group collateralized by fixed-rate certificates and the other group collateralized by variable-rate certificates. For each group, the 2000-A bonds match the maturity of the underlying certificates but have a floating rate coupon indexed to one-month LIBOR.

Subordinate MBS Portfolio

      Our Subordinate MBS portfolio is funded with Repurchase Agreements that re-price monthly at a rate equal to one-month LIBOR plus an interest rate margin. Therefore, to the extent that a subordinate security is not also re-pricing on a monthly basis to one-month LIBOR there is the potential for variability in our net interest income. To manage this re-pricing risk, as of March 31, 2005, approximately 39% of our Subordinate MBS portfolio was invested in bonds with coupons that reset monthly at a rate equal to one-month LIBOR plus an interest rate margin.

      In addition, as of March 31, 2005, we owned a $20 million notional amount, 6% LIBOR Cap interest rate agreement that matures November 2008.

Agency MBS Portfolio

      Our Agency MBS portfolio consists of fixed-rate bonds financed under one-month Repurchase Agreements that re-price monthly. To protect against potential losses due to a rise in interest rates, we have entered into forward commitments to sell a similar amount of to be announced, which we refer to as “TBA”, Fannie Mae and Freddie Mac Agency MBS with the same coupon interest rates as our whole pools.

Market Value Risk

      The market values of our investments are determined by a combination of interest rates, credit spreads and asset specific performance attributes, such as delinquencies. In general, increases in interest rates, widening credit spreads and deteriorating credit spreads will cause the value of the assets to decline. Changes in the market value of assets have two specific negative effects: increased financing margin requirements and, depending on an asset’s classification, a charge to income or to accumulated other comprehensive income. Another direct negative effect of changes in market value is that lenders may require additional margin under the terms of our Repurchase Agreements. This risk is managed by our liquidity reserve policy that is based upon an analysis of interest rate and credit spread volatility. We maintain liquidity under our liquidity policy to enable us to meet increased margin requirements if the value of our assets decline.

Mortgage Loan Portfolio

      Our Mortgage Loan portfolio is term financed via CMO borrowings and, therefore, changes in the market value of the mortgage loans cannot trigger margin requirements. Mortgage Loans that are securitized in a CMO are classified as CMO collateral. Mortgage loans that are designated as held for sale on our Consolidated Balance Sheets are reported at the lower of cost or market, with unrealized losses reported as a charge to earnings in the current period. Mortgage Loans designated as held for sale and CMO collateral are reported at amortized cost, net of allowance for loan losses. Therefore, only changes in market value that are deemed permanent impairments would be charged to income. Determination of market value is established by third party market prices. As of March 31, 2005, one bond from the 2000-A securitization is financed via a $1.3 million Repurchase Agreement and is subject to margin requirements. A liquidity reserve is maintained per our liquidity policy.

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Subordinate MBS Portfolio

      Securities in our Subordinate MBS portfolio are classified as available for sale and, therefore, changes in the market value are charged to accumulated other comprehensive income on our Consolidated Balance Sheets unless deemed other than temporary in which case the changes would be charged to income. Determination of market value is established by taking the lower of third party market prices and internally generated mark to market prices.

Agency MBS Portfolio

      Our Agency MBS portfolio is classified as trading for which changes in market value are reflected in the Consolidated Statements of Income. Our Agency MBS portfolio is economically hedged with forward sales of like-coupon Agency MBS and, therefore, changes in the market value of assets will be substantially offset by similar changes in the value of the forward sold securities.

Prepayment Risk

      Prepayments have a direct effect on the amortization of purchase discounts/premiums and the market value of assets. In general, in a mortgage portfolio, as interest rates increase prepayments will decline and as interest rates decrease prepayments will increase. The change in prepayment speed has a direct impact on the value of the mortgage asset. In general, assets owned at a discount will increase in value as prepayment speeds increase and the investor will be repaid sooner. Assets will decline in value as prepayment speeds decrease and the investor will have to wait longer for repayment. Assets owned at a premium will, in general, act in the opposite direction gaining value as prepayment speeds decrease and losing value as prepayment speeds increase.

      In general, our Subordinate MBS portfolio benefits from prepayment speeds that are greater than anticipated. Because prepayment principal is generally allocated to bonds senior to the Subordinate MBS, our Subordinate MBS grow as a percentage of the collateral pool, known as credit deleverage, thereby increasing their market value. Also, for adjustable rate securities the timing of the release of prepayment principal is affected by the rate of prepayments and slower prepayment may significantly affect market value.

Item 4. Controls and Procedures

      (a) As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings.

      (b) There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Securities Exchange Act of 1934, as amended, that occurred during the first quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

      From time to time, we are involved in litigation incidental to the conduct of our business. We are not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on our business, financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

      Not applicable.

Item 3. Defaults Upon Senior Securities

      Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

      Not applicable.

Item 5. Other Information

      Not applicable.

Item 6. Exhibits

      The exhibits listed on the Exhibit Index, which appears immediately following the signature page below, are included or incorporated by reference herein.

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Signatures

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

By:  /s/ JOHN A. BURCHETT

John A. Burchett

President and Chief Executive Officer

Chairman of the Board of Directors

(Principal Executive Officer)

Dated: May 16, 2005

By:  /s/ HAROLD F. McELRAFT

Harold F. McElraft

Chief Financial Officer and Treasurer

(Principal Financial and

Accounting Officer)

Dated: May 16, 2005

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EXHIBIT INDEX

Exhibit			Description
	2	.1*(7)	Stock Purchase Agreement dated as of July 1, 2002 by and between Registrant and John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
	3	.1(8)	Amended Articles of Incorporation of Registrant, as amended
	3	.2(1)	Bylaws of Registrant
	4	.1(1)	Specimen Common Stock Certificate of Registrant
	4	.2(15)	Amended and Restated Trust Agreement, dated as of March 15, 2005, among Registrant, as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as Delaware trustee, the administrative trustees named therein and the holders from time to time of individual beneficial interests in the assets of the trust
	4	.3(15)	Junior Subordinated Indenture, dated as of March 15, 2005, between JPMorgan Chase Bank, National Association, and Registrant
	4	.4(15)	Form of Junior Subordinated Note Due 2035, issued March 15, 2005
	4	.5(15)	Form of Preferred Security of Hanover Statutory Trust I, issued March 15, 2005
	10	.3*(1)	Registration Rights Agreement dated as of September 19, 1997 by and between Registrant and John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
	10	.5*(1)	Agreement and Plan of Recapitalization dated as of September 8, 1997 by and between Hanover Capital Partners Ltd. and John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
	10	.6*(1)	Bonus Incentive Compensation Plan dated as of September 9, 1997
	10	.7*(1)	1997 Executive and Non-Employee Director Stock Option Plan
	10	.7.1*(3)	1999 Equity Incentive Plan
	10	.8*(7)	Amended and Restated Employment Agreement effective as of July 1, 2002, by and between Registrant and John A. Burchett
	10	.8.1*(7)	Stock Option Agreement effective as of July 1, 2002 between Registrant and John A. Burchett
	10	.9*(7)	Amended and Restated Employment Agreement effective as of July 1, 2002, by and between Registrant and Irma N. Tavares
	10	.9.1*(7)	Stock Option Agreement effective as of July 1, 2002 between Registrant and Irma N. Tavares
	10	.10*(7)	Amended and Restated Employment Agreement effective as of July 1, 2002, by and between Registrant and Joyce S. Mizerak
	10	.10.1*(7)	Stock Option Agreement effective as of July 1, 2002 between Registrant and Joyce S. Mizerak
	10	.11*(7)	Amended and Restated Employment Agreement effective as of July 1, 2002, by and between Registrant and George J. Ostendorf
	10	.11.1*(7)	Stock Option Agreement effective as of July 1, 2002 between Registrant and George J. Ostendorf
	10	.11.2*(6)	Employment Agreement dated as of January 1, 2000 by and between Registrant and Thomas P. Kaplan
	10	.11.3*(9)	Stock Purchase Agreement as of December 13, 2002 between Thomas P. Kaplan and Registrant
	10	.11.4*(10)	Stock Purchase Agreement as of March 31, 2003 between John A. Burchett and Registrant
	10	.11.5*(10)	Stock Purchase Agreement as of March 31, 2003 between George J. Ostendorf and Registrant
	10	.12*	Employment Agreement dated as of April 14, 2005 by and between Registrant and Harold F. McElraft
	10	.13(1)	Office Lease Agreement, dated as of March 1, 1994, by and between Metroplex Associates and Hanover Capital Mortgage Corporation, as amended by the First Modification and Extension of Lease Amendment dated as of February 28, 1997

32

Exhibit			Description
	10	.13.1(9)	Second Modification and Extension of Lease Agreement dated April 22, 2002 by and between Metroplex Associates and Hanover Capital Mortgage Corporation
	10	.13.2(9)	Third Modification of Lease Agreement dated May 8, 2002 by and between Metroplex Associates and Hanover Capital Mortgage Corporation
	10	.13.3(9)	Fourth Modification of Lease Agreement dated November 2002 by and between Metroplex Associates and Hanover Capital Mortgage Corporation
	10	.13.4(12)	Fifth Modification of Lease Agreement dated October 9, 2003 by and between Metroplex Associates and Hanover Capital Partners Ltd.
	10	.14(3)	Office Lease Agreement, dated as of February 1, 1999, between LaSalle-Adams, L.L.C. and Hanover Capital Partners Ltd.
	10	.14.1(12)	First Amendment to Lease dated January 5, 2004 between LaSalle-Adams L.L.C. and Hanover Capital Partners Ltd.
	10	.15(9)	Office Lease Agreement, dated as of September 3, 1997, between Metro Four Associates Limited Partnership and Pamex Capital Partners, L.L.C., as amended by the First Amendment to Lease dated May 2000
	10	.15.1(12)	Sublease Agreement dated as of April 2004 between EasyLink Services, Inc. and HanoverTrade, Inc.
	10	.15.2(15)	Second Amendment to Lease, dated as of May 14, 2004, between Metro Four Associates Limited Partnership, as Landlord, and HanoverTrade, Inc. as Tenant
	10	.16(10)	Office Lease Agreement, dated as of July 10, 2002, between 233 Broadway Owners, LLC and Registrant
	10	.25*(1)	Contribution Agreement dated September 19, 1997 by and among Registrant, John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
	10	.25.1*(7)	Amendment No. 1 to Contribution Agreement entered into as of July 1, 2002 by and between Registrant, John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
	10	.25.2*(13)	Amendment No. 2 to Contribution Agreement entered into as of May 20, 2004 by and between Registrant, John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
	10	.26*(1)	Participation Agreement dated as of August 21, 1997 by and among Registrant, John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
	10	.27*(1)	Loan Agreement dated as of September 19, 1997 between Registrant and each of John A. Burchett, Joyce S. Mizerak, George J. Ostendorf and Irma N. Tavares
	10	.29(2)	Management Agreement, dated as of January 1, 1998, by and between Registrant and Hanover Capital Partners Ltd.
	10	.30(3)	Amendment Number One to Management Agreement, dated as of September 30, 1999
	10	.31(4)	Amended and Restated Master Loan and Security Agreement by and between Greenwich Capital Financial Products, Inc., Registrant and Hanover Capital Partners Ltd. dated March 27, 2000
	10	.31.3(9)	Amendment Number Six dated as of March 27, 2003 to the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000 by and among Registrant, Hanover Capital Partners, Ltd. and Greenwich Capital Financial Products, Inc.
	10	.31.4(10)	Amendment Number Seven dated as of April 27, 2003 to the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000 by and among Registrant, Hanover Capital Partners, Ltd. and Greenwich Capital Financial Products, Inc.
	10	.31.5(12)	Amendment Number Eight dated as of April 26, 2004 to the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000 by and among Registrant, Hanover Capital Partners, Ltd. and Greenwich Capital Financial Products, Inc.
	10	.33(5)	Stockholder Protection Rights Agreement dated as of April 11, 2000 by and between Registrant and State Street Bank & Trust Company, as Rights Agent

33

Exhibit			Description
	10	.33.1(7)	Amendment to Stockholder Protection Rights Agreement effective as of September 26, 2001, by and among Registrant, State Street Bank and Trust Company and EquiServe Trust Company, N.A.
	10	.33.2(7)	Second Amendment to Stockholder Protection Rights Agreement dated as of June 10, 2002 by and between Registrant and EquiServe Trust Company, N.A.
	10	.34(6)	Asset Purchase Agreement, dated as of January 19, 2001 by and among HanoverTrade.com, Inc., Registrant, Pamex Capital Partners, L.L.C. and the members of Pamex Capital Partners, L.L.C.
	10	.35(9)	Amended and Restated Limited Liability Agreement as of November 21, 2002 by and among BTD 2001 HDMF-1 Corp., Registrant and Provident Financial Group, Inc.
	10	.36.1(14)	Indemnity Agreement by and between Registrant and John A. Burchett, dated as of July 1, 2004
	10	.36.2(14)	Indemnity Agreement by and between Registrant and John A. Clymer, dated as of July 1, 2004
	10	.36.3(14)	Indemnity Agreement by and between Registrant and Joseph J. Freeman, dated as of July 1, 2004
	10	.36.4(14)	Indemnity Agreement by and between Registrant and Roberta M. Graffeo, dated as of July 1, 2004
	10	.36.5(14)	Indemnity Agreement by and between Registrant and A. Bradley Howe, dated as of July 1, 2004
	10	.36.6(14)	Indemnity Agreement by and between Registrant and Douglas L. Jacobs, dated as of July 1, 2004
	10	.36.7(14)	Indemnity Agreement by and between Registrant and J. Holly Loux, dated as of July 1, 2004
	10	.36.8(14)	Indemnity Agreement by and between Registrant and Richard J. Martinelli, dated as of July 1, 2004
	10	.36.9(14)	Indemnity Agreement by and between Registrant and Joyce S. Mizerak, dated as of July 1, 2004
	10	.36.10(14)	Indemnity Agreement by and between Registrant and Saiyid T. Naqvi, dated as of July 1, 2004
	10	.36.11(14)	Indemnity Agreement by and between Registrant and George J. Ostendorf, dated as of July 1, 2004
	10	.36.12(14)	Indemnity Agreement by and between Registrant and John N. Rees, dated as of July 1, 2004
	10	.36.13(14)	Indemnity Agreement by and between Registrant and David K. Steel, dated as of July 1, 2004
	10	.36.14(14)	Indemnity Agreement by and between Registrant and James F. Stone, dated as of July 1, 2004
	10	.36.15(14)	Indemnity Agreement by and between Registrant and James C. Strickler, dated as of July 1, 2004
	10	.36.16(14)	Indemnity Agreement by and between Registrant and Irma N. Tavares, dated as of July 1, 2004
	10	.36.17	Indemnity Agreement by and between Registrant and Harold F. McElraft, dated as of April 14, 2005
	10	.37(15)	Purchase Agreement, dated February 24, 2005, among Registrant, Hanover Statutory Trust I and Taberna Preferred Funding I, Ltd.
	16	.1(11)	Letter from Deloitte & Touche LLP, dated February 23, 2004
	31	.1	Certification by John A. Burchett pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification by Harold F. McElraft pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

34

Exhibit			Description
	32	.1(16)	Certification by John A. Burchett and Harold F. McElraft pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated herein by reference to Registrant’s Registration Statement on Form S-11, Registration No. 333-29261, as amended, which became effective under the Securities Act of 1933, as amended, on September 15, 1997.
(2)	Incorporated herein by reference to Registrant’s Form 10-K for the year ended December 31, 1997, as filed with the Securities and Exchange Commission on March 31, 1998.
(3)	Incorporated herein by reference to Registrant’s Form 10-K for the year ended December 31, 1999, as filed with the Securities and Exchange Commission on March 30, 2000.
(4)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended March 31, 2000, as filed with the Securities and Exchange Commission on May 15, 2000.
(5)	Incorporated herein by reference to Registrant’s report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2000.
(6)	Incorporated herein by reference to Registrant’s Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on April 2, 2001.
(7)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 16, 2002.
(8)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended June 30, 2002, as filed with the Securities and Exchange Commission on August 14, 2002.
(9)	Incorporated herein by reference to Registrant’s Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on March 28, 2003.

(10)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended March 31, 2003, as filed with the Securities and Exchange Commission on May 15, 2003.
(11)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on February 23, 2004.
(12)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended March 31, 2004, as filed with the Securities and Exchange Commission on May 24, 2004.
(13)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended June 30, 2004, as filed with the Securities and Exchange Commission on August 12, 2004.
(14)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2004, as filed with the Securities and Exchange Commission on November 9, 2004.
(15)	Incorporated herein by reference to Registrant’s Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on March 31, 2005.
(16)	Furnished herewith

* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K.

35 EX-10.12 2 b54807hcexv10w12.txt EX-10.12 EMPLOYMENT AGREEMENT DATED 4/14/05 EXHIBIT 10.12 [HANOVER CAPITAL MORTGAGE HOLDINGS, INC. LOGO] EMPLOYMENT LETTER April 14, 2005 Harold McElraft 34 Meyersville Road Chatham, NJ 07928 Dear Mr. McElraft: Please allow this letter to serve as the entire agreement between Hanover Capital Mortgage Holdings, Inc. (the "Company") and you, Harold McElraft (the "Employee") with respect to certain aspects of your employment with the Company. The Company acknowledges and agrees that the Employee is and will remain a partner of, and has and will retain an interest in, Tatum CFO Partners, LLP ("Tatum"), which will benefit the Company in that the Employee will have access to certain Tatum resources. Beginning Date The Employee will work for the Company as a full-time employee beginning on April 14, 2005. Compensation SALARY: $240,000 annually ("Salary"). Employee's Salary may be increased from time to time, by the Company as determined by annual reviews and performance evaluations consistent with the policies of the Company for its executive management. CASH BONUS: As determined from time to time and approved by the compensation committee of the Company's Board of Directors. EQUITY: Subject to future considerations. During the course of the Employee's engagement hereunder, the Employee will remain a partner of Tatum. As a partner of Tatum, Employee will share with Tatum a portion of his or her economic interest in any stock options or equity bonus that the Company may grant the Employee and may also share with Tatum a portion of any cash bonus and severance the Company may pay the Employee, to the extent specified in the Full-Time Permanent Engagement Resources Agreement between the Company and Tatum (the "Resources Agreement"). The Company acknowledges and consents to such arrangement. Benefits The Employee will be eligible to participate in any Company employee benefits programs (including but not limited to personal days, vacation days and holidays), insurance and retirement plans (e.g., 401K) consistent with the Company's policy and plan provisions as it applies to executive management, and the Employee will be exempt from any delay periods required for eligibility, if allowable under the plans. In lieu of the Employee participating in the Company-sponsored employee healthcare (i.e., medical, dental and vision) benefits plans, the Employee will remain on his or her current Tatum medical plan. The Company will reimburse the Employee for amounts paid by the Employee for such medical insurance for himself and (where applicable) his family of up to $1,500 per month upon presentation of reasonable documentation of premiums paid by the Employee to Tatum. If permissible under the U.S. federal tax law, such amount will not be considered reportable W-2 income, but instead as a non-taxable benefits expense. The Employee must receive written evidence that the Company maintains directors' and officers' insurance in an amount comparable to other executive officers of the Company at no additional cost to the Employee, and the Company will maintain such insurance at all times while this agreement remains in effect. Furthermore, the Company will maintain such insurance coverage with respect to occurrences arising during the term of this agreement for at least three years following the termination or expiration of this agreement or will purchase a directors' and officers' extended reporting period, or "tail," policy to cover the Tatum Partner. The Company agrees to execute an Indemnification Agreement with the Employee so as to indemnify the Employee to the full extent permitted by law for any losses, costs, damages, and expenses, including reasonable attorneys' fees, as they are incurred, in connection with any cause of action, suit, or other proceeding arising in connection with the Employee's employment with the Company. Termination The Company may terminate the Employee's employment for any reason upon at least 30 days' prior written notice to the Employee, such termination to be effective on the date specified in the notice, provided that such date is no earlier than 30 days from the date of delivery of the notice. Likewise, the Employee may terminate his or her employment for any reason upon at least 30 days' prior written notice to the Company, such termination to be effective on the date 30 days following the date of the notice. The Employee will continue to render services and to be paid during such 30-day period, regardless of who gives such notice. The Employee may terminate this agreement immediately if the Company has not remained current in its obligations under this letter or the Full-Time Permanent Engagement Resources Agreement between the Company and Tatum or if the Company engages in or asks the Employee to engage in or to ignore any illegal or unethical conduct. This agreement will terminate immediately upon the death or disability of the Employee. For purposes of this agreement, disability will be as defined by the applicable policy of disability insurance or, in the absence of such insurance, by the Company's Board of Directors acting in good faith. The Employee's salary will be prorated for the final pay period based on the number of days in the final pay period up to the effective date of termination or expiration. Severance If the termination of this agreement is within 90 days of the Beginning date, the employee will be entitled to receive a payment as severance equal to three months salary. If this agreement is terminated by the Company without cause or the required notice, or by the employee for cause, the Employee will be entitled to receive a payment as severance equal to three months salary. Miscellaneous This agreement contains the entire agreement between the parties with respect to the matters contained herein, superseding any prior oral or written statements or agreements. The provisions in this agreement concerning the payment of salary and bonuses will survive any termination or expiration of this agreement. The terms of this agreement are severable and may not be amended except in a writing signed by the parties. If any portion of this agreement is found to be unenforceable, the rest of this agreement will be enforceable except to the extent that the severed provision deprives either party of a substantial portion of its bargain. This agreement will be governed by and construed in all respects in accordance with the laws of the State of New Jersey without giving effect to conflicts-of-laws principles. Each person signing below is authorized to sign on behalf of the party indicated, and in each case such signature is the only one necessary. Please sign below and return a signed copy of this letter to indicate your agreement with its terms and conditions. Sincerely yours, Hanover Capital Mortgage Holdings, Inc. By: /s/ John A. Burchett ------------------------------------- (Signature) John A. Burchett, President and Chief Executive Officer Acknowledged and agreed by: EMPLOYEE: /s/ Harold F. McElraft --------------------------------- (Signature) Harold F. McElraft Date: April 15, 2005 EX-10.36.17 3 b54807hcexv10w36w17.txt EX-10.36.17 INDEMNITY AGREEMENT DATED 4/14/05 EXHIBIT 10.36.17 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT is to be effective as of April 14, 2005 (this "Agreement") by and between Hanover Capital Mortgage Holdings, Inc., a Maryland corporation, (the "Company") and Harold F. McElraft, Chief Financial Officer and Treasurer of the Company (together with such person's legal representatives or other successors, "Indemnitee"). WHEREAS, in order to induce Indemnitee to serve, or continue to serve, as Chief Financial Officer and Treasurer of the Company or to accept, or continue to accept, the duties, responsibilities and burdens associated with such service, the Company desires, and the board of directors of the Company have resolved to provide the Indemnitee with the indemnification arrangements set forth herein; and WHEREAS, Indemnitee is willing to serve or continue to serve as Chief Financial Officer and Treasurer of the Company on the terms set forth herein; NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS; INTERPRETIVE PRINCIPLES. (a) Definitions For purposes of this Agreement: "Affiliate" of any particular Person means any other Person controlling, controlled by or under common control with such particular Person, where "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, contract or otherwise. "Company Entity" shall mean the Company or any Subsidiary of the Company. "Corporate Status" describes the status of a Person who is or was a director, officer, partner, employee, trustee, agent or fiduciary of any Company Entity or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such Person is or was serving at the request of any Company Entity. "Disinterested Director" means a member of the board of directors of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. "Expenses" shall include all attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating or being or preparing to be a witness in any Proceeding or other proceeding of the type described in the definition of "Proceeding" set forth below. "Including" means including but not limited to. "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past three years has been, retained to represent: (i) any Company Entity or Indemnitee in any matter (other than with respect to matters concerning Indemnitee under this Agreement); or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any Person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing any Company Entity or Indemnitee in an action to determine Indemnitee's rights under this Agreement. "Losses" means judgments, penalties, liabilities, losses, claims, damages, fines and amounts, including amounts paid in settlement. "Person" shall mean any person or entity of any nature whatsoever, specifically including an individual, a firm, a company, a corporation, a limited liability company, a partnership, a trust or other entity. "Proceeding" includes any actual, threatened, pending or completed action, suit, litigation, claim, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened, pending or completed proceeding arising on or after the date hereof, whether brought by or in the right of any Company Entity or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that he is or was a director, officer, employee, trustee, agent, attorney-in-fact or fiduciary of any Company Entity at any time on or after the date hereof, or is or was serving at the request of any Company Entity as a director, officer, partner, employee, trustee, agent, attorney-in-fact or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action taken by him or of any inaction on his part, on or after the date hereof, while acting as director, officer, partner, employee, trustee, agent, attorney-in-fact or fiduciary of any Company Entity, or while serving at the request of any Company Entity as a director, officer, partner, employee, trustee, agent, attorney-in-fact or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, in each case whether or not he is acting or serving in any such capacity at the time any Expense, Loss or other amount for which indemnification can be provided under this Agreement is incurred or imposed. 2 "Subsidiary" shall mean with respect to any Person, any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by that Person. (b) Interpretive Principles For purposes of this Agreement, (i) the terms defined in this Section include the plural as well as the singular, (ii) the use of any gender herein shall be deemed to include the other genders; and (iii) references herein to Sections without reference to a document are to designated Sections in this Agreement. 2. SCOPE OF INDEMNIFICATION. The obligations of the Company to indemnify Indemnitee in the manner set forth in this Agreement shall continue in full force and effect, consistent with the terms of Section 10, notwithstanding any termination or resignation of the Indemnitee. 3. INDEMNITY. (a) If an Indemnitee was, is, or is threatened to be made a party to or participant in any Proceeding whether such Proceeding is by or in the right of any Company Entity, any third party or any other Person, the Company hereby agrees to hold harmless and indemnify from and against any and all Expenses and Losses incurred by Indemnitee or incurred on his behalf to the fullest extent authorized or permitted by applicable law, by the Charter of the Company and by the By-Laws of the Company as the foregoing may be amended from time to time, and including any and all Expenses and Losses arising out of or relating to the actual or alleged acts, omissions, negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the indemnification obligations of the Company pursuant to this Agreement is that the Company shall not be obligated to make any indemnity-related payment to Indemnitee that is finally determined (pursuant to the procedures and subject to the presumptions set forth in Sections 7 and 8) to be unlawful under Maryland law. (b) Notwithstanding any other provision of this Agreement to the contrary, to the extent that Indemnitee is a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified pursuant to subsection (a) above to the maximum extent permitted by law. However, if (i) Indemnitee is not wholly successful in a Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, and (ii) it is determined that it is unlawful for Indemnitee to be indemnified with respect to such unsuccessful claims, issues or matters, in such instance the Company shall indemnify Indemnitee against all Expenses and Losses incurred by Indemnitee, or incurred on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in a Proceeding by dismissal, with or without prejudice, shall be deemed to be successful on the merits or otherwise as to such claim, issue or matter. 3 4. CONTRIBUTION IN THE EVENT OF JOINT LIABILITY. (a) Irrespective of whether the indemnification rights granted pursuant to Section 3 are available in any given instance, it is agreed by the parties that with respect to any Proceeding in which any Company Entity is jointly liable with Indemnitee (or would be liable if joined in such Proceeding), the Company shall pay, in the first instance, the entire amount of any and all Expenses and Losses relating to or incurred in connection with such Proceeding, without requiring Indemnitee to contribute to such payment, and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. The Company shall not enter into any settlement of any Proceeding in which any Company Entity is jointly liable with Indemnitee (or would be liable if joined in such Proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee. (b) Without diminishing or impairing the obligations of the Company set forth in subsection (a) above, if, for any reason, Indemnitee should elect or be required by any relevant judicial or administrative authority to pay all or any portion of any Expenses and Losses relating to or incurred in connection with any Proceeding in which any Company Entity is jointly liable with Indemnitee (or would be liable if joined in such Proceeding), the Company shall contribute to the amount of Expenses and Losses incurred and paid or payable by Indemnitee. The contribution by the Company shall be in an amount proportional to (i) on the one hand, the relative benefits received or enjoyed from the transaction to which the Proceeding relates by any Company Entity and all directors, officers, partners, employees, trustees, agents, attorneys-in-fact or fiduciaries of any Company Entity (other than Indemnitee) who are jointly liable with Indemnitee (or would be liable if joined in such Proceeding), and (ii) the relative benefits received or enjoyed from the transaction to which the Proceeding relates by Indemnitee provided, however, that such proportional calculation, to the extent necessary to conform to applicable law, may be further adjusted: (i) by reference to the relative fault of any Company Entity and all directors, officers, partners, employees, trustees, agents, attorneys-in-fact or fiduciaries of any Company Entity (other than Indemnitee) who are jointly liable with Indemnitee (or would be if joined in such Proceeding) on the one hand and Indemnitee on the other hand in connection with the events that resulted in such Expenses and Losses; and/or (ii) by any other equitable considerations which the law may require to be considered. The relative fault of any Company Entity and all directors, officers, partners, employees, trustees, agents, attorneys-in-fact or fiduciaries of any Company Entity (other than Indemnitee) who are jointly liable with him (or would be liable if joined in such Proceeding) on the one hand, and Indemnitee, on the other hand, shall be determined by taking into account, among other factors, the degree to which their respective actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive. (c) The Company hereby agrees to fully indemnify and hold Indemnitee harmless from and against any and all claims of contribution which may be brought by any director, officer, employee, trustee, agent, attorney-in-fact or fiduciary of any Company Entity who may be jointly liable with Indemnitee in connection with any given Proceeding. 4 5. INDEMNIFICATION FOR EXPENSES INCURRED AS A WITNESS. Notwithstanding any other provision of this Agreement to the contrary, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, the Company shall indemnify Indemnitee for and against all Expenses actually incurred by Indemnitee or incurred on his behalf in connection therewith. 6. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of this Agreement to the contrary, the Company shall advance or directly pay all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding, within ten days after the receipt by the Company of any statement from Indemnitee requesting such advances or payments from time to time, whether prior to or after final disposition of such Proceeding. Such statement shall reasonably evidence the Expenses incurred by, or on behalf of, or charged to Indemnitee. In connection herewith, as a condition to any advancement or direct payment of any Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding, Indemnitee hereby agrees and undertakes to repay any Expenses advanced or paid hereunder, and Indemnitee shall, at the request of the Company, execute one or more agreements and undertakings in reasonable form, in favor of the Company or any insurer or other Person reasonably selected by the Company, to repay any Expenses advanced or paid if ultimately it is determined that Indemnitee is not entitled to be indemnified or reimbursed for such Expenses in any given instance, in accordance with applicable law and the Charter and By-laws of the Company, as the foregoing may be amended from time to time. The foregoing undertaking to repay such Expenses by Indemnitee shall be unsecured and interest-free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 6 shall be subject to the condition that if, when and to the extent that the Company reasonably determines that Indemnitee would not be permitted to be indemnified under applicable law (subject to the terms and conditions of Section 7) the Company shall be entitled to reimbursement within 30 days of such determination by Indemnitee for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that he should be indemnified under applicable law any determination made by the Company that Indemnitee is not entitled to indemnification under applicable law in a given instance shall not be binding, and Indemnitee shall not be required to reimburse the Company for any advance or payment of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or have lapsed). 7. PROCEDURES AND PRESUMPTIONS FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable and as broad as permitted under the law and public policy of Maryland. Accordingly, the parties hereby agree that the following procedures and presumptions shall apply if any question or dispute as to whether Indemnitee is entitled to indemnification under this Agreement. 5 (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and as may be reasonably necessary to enable the Company to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification advise the Company board of directors of such request in writing. Indemnitee's failure to strictly comply with the procedural requirements set forth in this Section, however, shall not relieve the Company of any obligation it may have to indemnify hereunder and shall not alter or waive any presumptions for determination of entitlement to indemnification contained herein. (b) Upon each submission of a written request by Indemnitee for indemnification pursuant to subsection (a) above, a determination with respect to Indemnitee's entitlement thereto shall be made in accordance with one of the following methods, the selection of which method shall be at Indemnitee's discretion: (i) by a majority vote of the Disinterested Directors even if such Disinterested Directors constitute less than a quorum; or (ii) by Independent Counsel in a written opinion pursuant to the procedures and selection processes set forth in subsection (c) below. (c) If Indemnitee elects for the determination of entitlement to indemnification to be made by Independent Counsel pursuant to subsection (b) above, the Independent Counsel shall be selected as provided in this subsection (c). The Independent Counsel shall be selected by Indemnitee (unless he requests that the selection be made by the Company board of directors) with the approval of the Company (which approval may not be unreasonably withheld). The Company shall pay any and all Expenses of such Independent Counsel relating to its performance of services in connection herewith, and the Company shall pay all Expenses incident to the procedures contained in this subsection (c) irrespective of the manner in which such Independent Counsel was selected or appointed. (d) In making a determination with respect to Indemnitee's entitlement to indemnification hereunder, the Person(s) making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if he has submitted a request for indemnification in accordance with subsection (a) above. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. In addition, if the Person(s) making a determination pursuant to subsection (b) above shall determine that Indemnitee is not entitled to indemnification hereunder, such determination shall not create a presumption against Indemnitee's entitlement to indemnification in any later action, suit or proceeding initiated by Indemnitee to enforce his rights under this Agreement. (e) Indemnitee shall be presumed to have acted in good faith if his action is based on the records or books of account of any Company Entity or any other Person, including financial statements, or on information supplied to Indemnitee by the officers of any Company Entity or such other Person, in the course of their duties or on the advice of legal counsel for any Company Entity, or on information or records given or reports made to any Company Entity by an independent certified public accountant, by a financial advisor or by an appraiser or other 6 expert selected by any Company Entity. In addition, the knowledge and/or actions, or failure to act, of any director, officer, partner, agent, trustee or employee of any Company Entity or any other Person, shall not be imputed to Indemnitee for purposes of determining his right to indemnification under this Agreement. Irrespective of whether the foregoing provisions of this subsection (e) are satisfied, it shall be presumed in any event that each Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of any Company Entity. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. (f) The Company acknowledges that a settlement or other disposition of a Proceeding short of final judgment may be desirable if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. If any Proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including settlement of such Proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such Proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. (g) If the Person(s) empowered or selected under subsection (b) above to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 30 days after receipt by the Company of the request therefore, the requisite determination of entitlement to indemnification shall be deemed to have been made in favor of the Indemnitee, and he shall be entitled to such indemnification, absent (i) an intentional misstatement by Indemnitee of a material fact, or an intentional omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification; or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30-day period may be extended for a reasonable time, not to exceed an additional 15 days, if the Person(s) making such determination reasonably and in good faith requires such additional time to complete the obtaining or evaluation of documentation and/or information relating thereto. (h) Indemnitee shall reasonably cooperate with the Person(s) making the determination regarding his entitlement to indemnification, including providing to such Person(s) upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel or member of the board of directors of the Company shall act reasonably and in good faith in making a determination of Indemnitee's entitlement to indemnification hereunder. Any Expenses incurred by Indemnitee in so cooperating with the Person(s) making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification), and the Company hereby agrees to indemnify and hold harmless Indemnitee therefrom. 8. REMEDIES. (a) If: (i) a determination is made pursuant to Section 7 that Indemnitee is not entitled to indemnification under this Agreement; (ii) advancement of Expenses is not timely 7 made pursuant to Section 6; (iii) contribution is not made pursuant to Section 4; (iv) no determination of entitlement to indemnification is made pursuant to Section 7 within 90 days after receipt by the Company of the request for indemnification; (v) payment of indemnification pursuant to this Agreement is not made within ten days of the receipt by the Company of a written request therefore; (vi) payment of indemnification is not made within ten days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 7; or (vii) the Company has not complied with any other term of this Agreement intended for the benefit of Indemnitee, then in any such event, Indemnitee shall be entitled to an adjudication of the foregoing in an appropriate court in Maryland, or in any other court of competent jurisdiction. The Company shall not oppose Indemnitee's right to seek any such adjudication. (b) If a determination shall have been made pursuant to Section 7 that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 8 shall be conducted in all respects as a de novo trial, on the merits, and Indemnitee shall not be prejudiced by reason of that adverse determination. (c) If a determination shall have been made pursuant to Section 7 that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 8, absent a prohibition of such indemnification under applicable law. (d) If Indemnitee, pursuant to this Section 8, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors' and officers' liability insurance policies maintained by the Company, the Company shall pay on his behalf, in advance, any and all Expenses incurred by him in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery. (e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company are bound by all the provisions of this Agreement. 9. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) The rights of indemnification, advancement or contribution set forth in this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Charter of the Company, the By-Laws of the Company or any other agreement to which the Indemnitee, the Company or any Affiliates of the Company is a party. No amendment, alteration or repeal of this Agreement or any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by Indemnitee as a function of his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the law, whether by statute or judicial decision, permits greater indemnification, advancement or contribution rights than 8 currently are afforded under the Charter of the Company, the By-Laws of the Company and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy conferred herein is intended to be exclusive of any other right or remedy of Indemnitee, and every other right or remedy shall be cumulative and in addition to every other right or remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder shall not prevent the concurrent assertion or employment of any other right or remedy. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for a director, officer, partner, employee, trustee, agent, attorney-in-fact or fiduciary of any Company Entity or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such Person serves at the request of any Company Entity, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, partner, employee, trustee, agent, attorney-in-fact or fiduciary under such policy or policies. If, at the time of a request for indemnification under this Agreement, the Company has such a policy or policies in effect, the Company shall give prompt notice of the commencement of a Proceeding to the insurers in accordance with the procedures set forth in the respective policy or policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the provisions of such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee otherwise and actually has received such payment under any insurance policy, contract, agreement or otherwise. 10. DURATION OF AGREEMENT. All agreements and obligations of the Company contained herein shall continue with respect to Indemnitee during the period in which he serves as a director, officer, partner, employee, trustee, agent, attorney-in-fact or fiduciary of any Company Entity (or is or was serving at the request of any Company Entity as a director, officer, partner, employee, trustee, agent, attorney-in-fact or fiduciary of another corporation, partnership, joint venture, trust or other enterprise), whether or not such service occurred prior to or after the date this Agreement was effective, and shall continue in perpetuity thereafter, whether or not Indemnitee is acting or serving in any such capacity at the time any Expenses or Losses are incurred for which indemnification, advancement or contribution can be provided under this Agreement. This Agreement shall be binding upon, shall inure to the benefit of and shall be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by 9 purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. 11. SECURITY. To the extent requested by Indemnitee and approved by the Company board of directors, the Company may at any time and from time to time provide security to Indemnitee for the obligations of the Company hereunder through an irrevocable bank line of credit, funded trust or other collateral or by other means. Any such security, once provided to Indemnitee, may not be revoked or released without the prior written consent of such Indemnitee. 12. ENFORCEMENT; ENTIRE AGREEMENT. (a) The Company expressly confirms and agrees that it has entered into this Agreement and has assumed the obligations imposed on it hereby in order to induce Indemnitee to serve or continue to serve as a director, officer, partner, employee, trustee, agent, attorney-in-fact or fiduciary of any Company Entity, and the Company acknowledges that Indemnitee is relying upon this Agreement in agreeing to serve as a director, officer, partner, employee, trustee, agent, attorney-in-fact or fiduciary of any Company Entity. (b) Subject to Section 9, this Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof, except to the extent referenced in Section 9 hereof. 13. SEVERABILITY. If any provision of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall not be affected or impaired in any way thereby and shall remain enforceable to the fullest extent permitted by law; and (ii) to the fullest extent possible, the provisions of this Agreement (including each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 14. MODIFICATION AND WAIVER. No supplement, modification, waiver, termination or amendment of all or any portion of this Agreement shall be binding unless expressed in a written instrument executed by the parties hereto. No waiver of any term or provision of this Agreement shall be deemed or shall constitute a waiver of any other term or provision hereof (whether or not similar), and any such waiver shall be effective only in the specific instance, for the specific duration and for the express purpose for which it is given. Any waiver or failure to insist upon strict compliance with any 10 term or provision of this Agreement shall not operate as a waiver of, or an estoppel with respect to, any subsequent or other failure to comply. 15. NOTICE OF SERVICE BY INDEMNITEE. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligations which it may have to Indemnitee under this Agreement or otherwise. 16. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by and receipted for by the party to whom said notice or other communication shall have been directed; (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed; or (iii) sent by facsimile, the successful transmission and receipt of which is confirmed in a written report; in each instance to the addresses and/or facsimile numbers set forth below: (a) If to Indemnitee, to: Harold F. McElraft 34 Meyersville Rd Chatham, NJ 07928 Facsimile: (973) 635-4234 (b) If to the Company, to: Hanover Capital Mortgage Holdings, Inc. 379 Thornall Street Edison, New Jersey 08837 Attention: General Counsel Facsimile: (732) 548-0286 or to such other address or facsimile number as may have been furnished to Indemnitee by the Company, as the case may be. 17. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 18. HEADINGS. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction or interpretation thereof. 11 19. GOVERNING LAW. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of Maryland without application of the conflict of laws principles thereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. HANOVER CAPITAL MORTGAGE HOLDINGS, INC. By: /s/ John A. Burchett ------------------------------- John A. Burchett President and CEO INDEMNITEE /s/ Harold F. McElraft ----------------------------------- Harold F. McElraft 12 EX-31.1 4 b54807hcexv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF THE C.E.O. EXHIBIT 31.1 CERTIFICATION BY JOHN A. BURCHETT PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14(A), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John A. Burchett, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Hanover Capital Mortgage Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ John A. Burchett --------------------------------- John A. Burchett President and Chief Executive Officer Date: May 16, 2005 EX-31.2 5 b54807hcexv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE C.F.O. EXHIBIT 31.2 CERTIFICATION BY HAROLD F. MCELRAFT PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14(A), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Harold F. McElraft, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Hanover Capital Mortgage Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Harold F. McElraft --------------------------------- Harold F. McElraft Chief Financial Officer and Treasurer Date: May 16, 2005 EX-32.1 6 b54807hcexv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE C.E.O. AND C.F.O. EXHIBIT 32.1 HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 John A. Burchett, President and Chief Executive Officer, and Harold F. McElraft, Chief Financial Officer and Treasurer, of Hanover Capital Mortgage Holdings, Inc. (the "Company"), certify to each such officer's knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that: 1. The Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 16, 2005 By: /s/ JOHN A. BURCHETT ------------------------------------- John A. Burchett President and Chief Executive Officer Date: May 16, 2005 By: /s/ HAROLD F. MCELRAFT ------------------------------------- Harold F. McElraft Chief Financial Officer and Treasurer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.12

                                                                   EXHIBIT 10.12

[HANOVER CAPITAL MORTGAGE HOLDINGS, INC. LOGO]

                                EMPLOYMENT LETTER

April 14, 2005

Harold McElraft
34 Meyersville Road
Chatham, NJ 07928

Dear Mr. McElraft:

Please allow this letter to serve as the entire agreement between Hanover
Capital Mortgage Holdings, Inc. (the "Company") and you, Harold McElraft (the
"Employee") with respect to certain aspects of your employment with the Company.
The Company acknowledges and agrees that the Employee is and will remain a
partner of, and has and will retain an interest in, Tatum CFO Partners, LLP
("Tatum"), which will benefit the Company in that the Employee will have access
to certain Tatum resources.

                                 Beginning Date

The Employee will work for the Company as a full-time employee beginning on
April 14, 2005.

                                  Compensation

SALARY: $240,000 annually ("Salary"). Employee's Salary may be increased from
time to time, by the Company as determined by annual reviews and performance
evaluations consistent with the policies of the Company for its executive
management.

CASH BONUS: As determined from time to time and approved by the compensation
committee of the Company's Board of Directors.

EQUITY: Subject to future considerations.

During the course of the Employee's engagement hereunder, the Employee will
remain a partner of Tatum. As a partner of Tatum, Employee will share with Tatum
a portion of his or her economic interest in any stock options or equity bonus
that the Company may grant the Employee and may also share with Tatum a portion
of any cash bonus and severance the Company may pay the Employee, to the extent
specified in the Full-Time Permanent Engagement Resources Agreement between the
Company and Tatum (the "Resources Agreement"). The Company acknowledges and
consents to such arrangement.

                                    Benefits

The Employee will be eligible to participate in any Company employee benefits
programs (including but not limited to personal days, vacation days and
holidays), insurance and retirement plans (e.g., 401K) consistent with the
Company's policy and plan provisions as it applies to executive management, and
the Employee will be exempt from any delay periods required for eligibility, if
allowable under the plans.



In lieu of the Employee participating in the Company-sponsored employee
healthcare (i.e., medical, dental and vision) benefits plans, the Employee will
remain on his or her current Tatum medical plan. The Company will reimburse the
Employee for amounts paid by the Employee for such medical insurance for himself
and (where applicable) his family of up to $1,500 per month upon presentation of
reasonable documentation of premiums paid by the Employee to Tatum. If
permissible under the U.S. federal tax law, such amount will not be considered
reportable W-2 income, but instead as a non-taxable benefits expense.

The Employee must receive written evidence that the Company maintains directors'
and officers' insurance in an amount comparable to other executive officers of
the Company at no additional cost to the Employee, and the Company will maintain
such insurance at all times while this agreement remains in effect.

Furthermore, the Company will maintain such insurance coverage with respect to
occurrences arising during the term of this agreement for at least three years
following the termination or expiration of this agreement or will purchase a
directors' and officers' extended reporting period, or "tail," policy to cover
the Tatum Partner.

The Company agrees to execute an Indemnification Agreement with the Employee so
as to indemnify the Employee to the full extent permitted by law for any losses,
costs, damages, and expenses, including reasonable attorneys' fees, as they are
incurred, in connection with any cause of action, suit, or other proceeding
arising in connection with the Employee's employment with the Company.

                                   Termination

The Company may terminate the Employee's employment for any reason upon at least
30 days' prior written notice to the Employee, such termination to be effective
on the date specified in the notice, provided that such date is no earlier than
30 days from the date of delivery of the notice. Likewise, the Employee may
terminate his or her employment for any reason upon at least 30 days' prior
written notice to the Company, such termination to be effective on the date 30
days following the date of the notice. The Employee will continue to render
services and to be paid during such 30-day period, regardless of who gives such
notice. The Employee may terminate this agreement immediately if the Company has
not remained current in its obligations under this letter or the Full-Time
Permanent Engagement Resources Agreement between the Company and Tatum or if the
Company engages in or asks the Employee to engage in or to ignore any illegal or
unethical conduct.

This agreement will terminate immediately upon the death or disability of the
Employee. For purposes of this agreement, disability will be as defined by the
applicable policy of disability insurance or, in the absence of such insurance,
by the Company's Board of Directors acting in good faith.

The Employee's salary will be prorated for the final pay period based on the
number of days in the final pay period up to the effective date of termination
or expiration.

                                    Severance

If the termination of this agreement is within 90 days of the Beginning date,
the employee will be entitled to receive a payment as severance equal to three
months salary. If this agreement is terminated by the Company without cause or
the required notice, or by the employee for cause, the Employee will be entitled
to receive a payment as severance equal to three months salary.



                                  Miscellaneous

This agreement contains the entire agreement between the parties with respect to
the matters contained herein, superseding any prior oral or written statements
or agreements.

The provisions in this agreement concerning the payment of salary and bonuses
will survive any termination or expiration of this agreement.

The terms of this agreement are severable and may not be amended except in a
writing signed by the parties. If any portion of this agreement is found to be
unenforceable, the rest of this agreement will be enforceable except to the
extent that the severed provision deprives either party of a substantial portion
of its bargain.

This agreement will be governed by and construed in all respects in accordance
with the laws of the State of New Jersey without giving effect to
conflicts-of-laws principles.

Each person signing below is authorized to sign on behalf of the party
indicated, and in each case such signature is the only one necessary.

Please sign below and return a signed copy of this letter to indicate your
agreement with its terms and conditions.

Sincerely yours,

Hanover Capital Mortgage Holdings, Inc.

By: /s/ John A. Burchett
    -------------------------------------
    (Signature)

John A. Burchett, President and Chief Executive Officer

Acknowledged and agreed by:

                       EMPLOYEE:

                       /s/  Harold F. McElraft
                       ---------------------------------
                       (Signature)

                       Harold F. McElraft

                       Date: April 15, 2005

EX-10.36.17

                                                                EXHIBIT 10.36.17

                            INDEMNIFICATION AGREEMENT

      THIS INDEMNIFICATION AGREEMENT is to be effective as of April 14, 2005
(this "Agreement") by and between Hanover Capital Mortgage Holdings, Inc., a
Maryland corporation, (the "Company") and Harold F. McElraft, Chief Financial
Officer and Treasurer of the Company (together with such person's legal
representatives or other successors, "Indemnitee").

      WHEREAS, in order to induce Indemnitee to serve, or continue to serve, as
Chief Financial Officer and Treasurer of the Company or to accept, or continue
to accept, the duties, responsibilities and burdens associated with such
service, the Company desires, and the board of directors of the Company have
resolved to provide the Indemnitee with the indemnification arrangements set
forth herein; and

      WHEREAS, Indemnitee is willing to serve or continue to serve as Chief
Financial Officer and Treasurer of the Company on the terms set forth herein;

      NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements contained herein, and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

      1.    DEFINITIONS; INTERPRETIVE PRINCIPLES.

            (a)   Definitions

            For purposes of this Agreement:

                  "Affiliate" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.

                  "Company Entity" shall mean the Company or any Subsidiary of
the Company.

                  "Corporate Status" describes the status of a Person who is or
was a director, officer, partner, employee, trustee, agent or fiduciary of any
Company Entity or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which such Person is or was serving at
the request of any Company Entity.

                  "Disinterested Director" means a member of the board of
directors of the Company who is not and was not a party to the Proceeding in
respect of which indemnification is sought by Indemnitee.



                  "Expenses" shall include all attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, participating or being or preparing to be a
witness in any Proceeding or other proceeding of the type described in the
definition of "Proceeding" set forth below.

                  "Including" means including but not limited to.

                  "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past three years has been, retained to represent: (i) any Company
Entity or Indemnitee in any matter (other than with respect to matters
concerning Indemnitee under this Agreement); or (ii) any other party to the
Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding
the foregoing, the term "Independent Counsel" shall not include any Person who,
under the applicable standards of professional conduct then prevailing, would
have a conflict of interest in representing any Company Entity or Indemnitee in
an action to determine Indemnitee's rights under this Agreement.

                  "Losses" means judgments, penalties, liabilities, losses,
claims, damages, fines and amounts, including amounts paid in settlement.

                  "Person" shall mean any person or entity of any nature
whatsoever, specifically including an individual, a firm, a company, a
corporation, a limited liability company, a partnership, a trust or other
entity.

                  "Proceeding" includes any actual, threatened, pending or
completed action, suit, litigation, claim, arbitration, mediation, alternate
dispute resolution mechanism, investigation, inquiry, administrative hearing or
any other actual, threatened, pending or completed proceeding arising on or
after the date hereof, whether brought by or in the right of any Company Entity
or otherwise and whether civil, criminal, administrative or investigative, in
which Indemnitee was, is or will be involved as a party or otherwise, by reason
of the fact that he is or was a director, officer, employee, trustee, agent,
attorney-in-fact or fiduciary of any Company Entity at any time on or after the
date hereof, or is or was serving at the request of any Company Entity as a
director, officer, partner, employee, trustee, agent, attorney-in-fact or
fiduciary of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action taken by him or of any inaction on his
part, on or after the date hereof, while acting as director, officer, partner,
employee, trustee, agent, attorney-in-fact or fiduciary of any Company Entity,
or while serving at the request of any Company Entity as a director, officer,
partner, employee, trustee, agent, attorney-in-fact or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise, in each case
whether or not he is acting or serving in any such capacity at the time any
Expense, Loss or other amount for which indemnification can be provided under
this Agreement is incurred or imposed.

                                        2


                  "Subsidiary" shall mean with respect to any Person, any
corporation or other entity of which a majority of the voting power of the
voting equity securities or equity interest is owned, directly or indirectly, by
that Person.

            (b)   Interpretive Principles

            For purposes of this Agreement, (i) the terms defined in this
Section include the plural as well as the singular, (ii) the use of any gender
herein shall be deemed to include the other genders; and (iii) references herein
to Sections without reference to a document are to designated Sections in this
Agreement.

      2.    SCOPE OF INDEMNIFICATION.

      The obligations of the Company to indemnify Indemnitee in the manner set
forth in this Agreement shall continue in full force and effect, consistent with
the terms of Section 10, notwithstanding any termination or resignation of the
Indemnitee.

      3.    INDEMNITY.

            (a)   If an Indemnitee was, is, or is threatened to be made a party
to or participant in any Proceeding whether such Proceeding is by or in the
right of any Company Entity, any third party or any other Person, the Company
hereby agrees to hold harmless and indemnify from and against any and all
Expenses and Losses incurred by Indemnitee or incurred on his behalf to the
fullest extent authorized or permitted by applicable law, by the Charter of the
Company and by the By-Laws of the Company as the foregoing may be amended from
time to time, and including any and all Expenses and Losses arising out of or
relating to the actual or alleged acts, omissions, negligence or active or
passive wrongdoing of Indemnitee. The only limitation that shall exist upon the
indemnification obligations of the Company pursuant to this Agreement is that
the Company shall not be obligated to make any indemnity-related payment to
Indemnitee that is finally determined (pursuant to the procedures and subject to
the presumptions set forth in Sections 7 and 8) to be unlawful under Maryland
law.

            (b)   Notwithstanding any other provision of this Agreement to the
contrary, to the extent that Indemnitee is a party to and is successful, on the
merits or otherwise, in any Proceeding, he shall be indemnified pursuant to
subsection (a) above to the maximum extent permitted by law. However, if (i)
Indemnitee is not wholly successful in a Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, and (ii) it is determined that it is unlawful for
Indemnitee to be indemnified with respect to such unsuccessful claims, issues or
matters, in such instance the Company shall indemnify Indemnitee against all
Expenses and Losses incurred by Indemnitee, or incurred on his behalf in
connection with each successfully resolved claim, issue or matter. For purposes
of this Section and without limitation, the termination of any claim, issue or
matter in a Proceeding by dismissal, with or without prejudice, shall be deemed
to be successful on the merits or otherwise as to such claim, issue or matter.

                                        3


      4.    CONTRIBUTION IN THE EVENT OF JOINT LIABILITY.

            (a)   Irrespective of whether the indemnification rights granted
pursuant to Section 3 are available in any given instance, it is agreed by the
parties that with respect to any Proceeding in which any Company Entity is
jointly liable with Indemnitee (or would be liable if joined in such
Proceeding), the Company shall pay, in the first instance, the entire amount of
any and all Expenses and Losses relating to or incurred in connection with such
Proceeding, without requiring Indemnitee to contribute to such payment, and the
Company hereby waives and relinquishes any right of contribution it may have
against Indemnitee. The Company shall not enter into any settlement of any
Proceeding in which any Company Entity is jointly liable with Indemnitee (or
would be liable if joined in such Proceeding) unless such settlement provides
for a full and final release of all claims asserted against Indemnitee.

            (b)   Without diminishing or impairing the obligations of the
Company set forth in subsection (a) above, if, for any reason, Indemnitee should
elect or be required by any relevant judicial or administrative authority to pay
all or any portion of any Expenses and Losses relating to or incurred in
connection with any Proceeding in which any Company Entity is jointly liable
with Indemnitee (or would be liable if joined in such Proceeding), the Company
shall contribute to the amount of Expenses and Losses incurred and paid or
payable by Indemnitee. The contribution by the Company shall be in an amount
proportional to (i) on the one hand, the relative benefits received or enjoyed
from the transaction to which the Proceeding relates by any Company Entity and
all directors, officers, partners, employees, trustees, agents,
attorneys-in-fact or fiduciaries of any Company Entity (other than Indemnitee)
who are jointly liable with Indemnitee (or would be liable if joined in such
Proceeding), and (ii) the relative benefits received or enjoyed from the
transaction to which the Proceeding relates by Indemnitee provided, however,
that such proportional calculation, to the extent necessary to conform to
applicable law, may be further adjusted: (i) by reference to the relative fault
of any Company Entity and all directors, officers, partners, employees,
trustees, agents, attorneys-in-fact or fiduciaries of any Company Entity (other
than Indemnitee) who are jointly liable with Indemnitee (or would be if joined
in such Proceeding) on the one hand and Indemnitee on the other hand in
connection with the events that resulted in such Expenses and Losses; and/or
(ii) by any other equitable considerations which the law may require to be
considered. The relative fault of any Company Entity and all directors,
officers, partners, employees, trustees, agents, attorneys-in-fact or
fiduciaries of any Company Entity (other than Indemnitee) who are jointly liable
with him (or would be liable if joined in such Proceeding) on the one hand, and
Indemnitee, on the other hand, shall be determined by taking into account, among
other factors, the degree to which their respective actions were motivated by
intent to gain personal profit or advantage, the degree to which their liability
is primary or secondary and the degree to which their conduct is active or
passive.

            (c)   The Company hereby agrees to fully indemnify and hold
Indemnitee harmless from and against any and all claims of contribution which
may be brought by any director, officer, employee, trustee, agent,
attorney-in-fact or fiduciary of any Company Entity who may be jointly liable
with Indemnitee in connection with any given Proceeding.

                                        4


      5.    INDEMNIFICATION FOR EXPENSES INCURRED AS A WITNESS.

      Notwithstanding any other provision of this Agreement to the contrary, to
the extent that Indemnitee is, by reason of his Corporate Status, a witness in
any Proceeding to which Indemnitee is not a party, the Company shall indemnify
Indemnitee for and against all Expenses actually incurred by Indemnitee or
incurred on his behalf in connection therewith.

      6.    ADVANCEMENT OF EXPENSES.

      Notwithstanding any other provision of this Agreement to the contrary, the
Company shall advance or directly pay all Expenses incurred by or on behalf of
Indemnitee in connection with any Proceeding, within ten days after the receipt
by the Company of any statement from Indemnitee requesting such advances or
payments from time to time, whether prior to or after final disposition of such
Proceeding. Such statement shall reasonably evidence the Expenses incurred by,
or on behalf of, or charged to Indemnitee. In connection herewith, as a
condition to any advancement or direct payment of any Expenses incurred by or on
behalf of Indemnitee in connection with any Proceeding, Indemnitee hereby agrees
and undertakes to repay any Expenses advanced or paid hereunder, and Indemnitee
shall, at the request of the Company, execute one or more agreements and
undertakings in reasonable form, in favor of the Company or any insurer or other
Person reasonably selected by the Company, to repay any Expenses advanced or
paid if ultimately it is determined that Indemnitee is not entitled to be
indemnified or reimbursed for such Expenses in any given instance, in accordance
with applicable law and the Charter and By-laws of the Company, as the foregoing
may be amended from time to time. The foregoing undertaking to repay such
Expenses by Indemnitee shall be unsecured and interest-free. Notwithstanding the
foregoing, the obligation of the Company to advance Expenses pursuant to this
Section 6 shall be subject to the condition that if, when and to the extent that
the Company reasonably determines that Indemnitee would not be permitted to be
indemnified under applicable law (subject to the terms and conditions of Section
7) the Company shall be entitled to reimbursement within 30 days of such
determination by Indemnitee for all such amounts theretofore paid; provided,
however, that if Indemnitee has commenced or thereafter commences legal
proceedings in a court of competent jurisdiction to secure a determination that
he should be indemnified under applicable law any determination made by the
Company that Indemnitee is not entitled to indemnification under applicable law
in a given instance shall not be binding, and Indemnitee shall not be required
to reimburse the Company for any advance or payment of Expenses until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or have lapsed).

      7.    PROCEDURES AND PRESUMPTIONS FOR DETERMINATION OF ENTITLEMENT TO
            INDEMNIFICATION.

      It is the intent of this Agreement to secure for Indemnitee rights of
indemnity that are as favorable and as broad as permitted under the law and
public policy of Maryland. Accordingly, the parties hereby agree that the
following procedures and presumptions shall apply if any question or dispute as
to whether Indemnitee is entitled to indemnification under this Agreement.

                                        5


            (a)   To obtain indemnification under this Agreement, Indemnitee
shall submit to the Company a written request, including therein or therewith
such documentation and information as is reasonably available to Indemnitee and
as may be reasonably necessary to enable the Company to determine whether and to
what extent Indemnitee is entitled to indemnification. The Secretary of the
Company shall, promptly upon receipt of such a request for indemnification
advise the Company board of directors of such request in writing. Indemnitee's
failure to strictly comply with the procedural requirements set forth in this
Section, however, shall not relieve the Company of any obligation it may have to
indemnify hereunder and shall not alter or waive any presumptions for
determination of entitlement to indemnification contained herein.

            (b)   Upon each submission of a written request by Indemnitee for
indemnification pursuant to subsection (a) above, a determination with respect
to Indemnitee's entitlement thereto shall be made in accordance with one of the
following methods, the selection of which method shall be at Indemnitee's
discretion: (i) by a majority vote of the Disinterested Directors even if such
Disinterested Directors constitute less than a quorum; or (ii) by Independent
Counsel in a written opinion pursuant to the procedures and selection processes
set forth in subsection (c) below.

            (c)   If Indemnitee elects for the determination of entitlement to
indemnification to be made by Independent Counsel pursuant to subsection (b)
above, the Independent Counsel shall be selected as provided in this subsection
(c). The Independent Counsel shall be selected by Indemnitee (unless he requests
that the selection be made by the Company board of directors) with the approval
of the Company (which approval may not be unreasonably withheld). The Company
shall pay any and all Expenses of such Independent Counsel relating to its
performance of services in connection herewith, and the Company shall pay all
Expenses incident to the procedures contained in this subsection (c)
irrespective of the manner in which such Independent Counsel was selected or
appointed.

            (d)   In making a determination with respect to Indemnitee's
entitlement to indemnification hereunder, the Person(s) making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if he has submitted a request for indemnification in accordance
with subsection (a) above. Anyone seeking to overcome this presumption shall
have the burden of proof and the burden of persuasion, by clear and convincing
evidence. In addition, if the Person(s) making a determination pursuant to
subsection (b) above shall determine that Indemnitee is not entitled to
indemnification hereunder, such determination shall not create a presumption
against Indemnitee's entitlement to indemnification in any later action, suit or
proceeding initiated by Indemnitee to enforce his rights under this Agreement.

            (e)   Indemnitee shall be presumed to have acted in good faith if
his action is based on the records or books of account of any Company Entity or
any other Person, including financial statements, or on information supplied to
Indemnitee by the officers of any Company Entity or such other Person, in the
course of their duties or on the advice of legal counsel for any Company Entity,
or on information or records given or reports made to any Company Entity by an
independent certified public accountant, by a financial advisor or by an
appraiser or other

                                        6


expert selected by any Company Entity. In addition, the knowledge and/or
actions, or failure to act, of any director, officer, partner, agent, trustee or
employee of any Company Entity or any other Person, shall not be imputed to
Indemnitee for purposes of determining his right to indemnification under this
Agreement. Irrespective of whether the foregoing provisions of this subsection
(e) are satisfied, it shall be presumed in any event that each Indemnitee has at
all times acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of any Company Entity. Anyone seeking to
overcome this presumption shall have the burden of proof and the burden of
persuasion, by clear and convincing evidence.

            (f)   The Company acknowledges that a settlement or other
disposition of a Proceeding short of final judgment may be desirable if it
permits a party to avoid expense, delay, distraction, disruption and
uncertainty. If any Proceeding to which Indemnitee is a party is resolved in any
manner other than by adverse judgment against Indemnitee (including settlement
of such Proceeding with or without payment of money or other consideration) it
shall be presumed that Indemnitee has been successful on the merits or otherwise
in such Proceeding. Anyone seeking to overcome this presumption shall have the
burden of proof and the burden of persuasion by clear and convincing evidence.

            (g)   If the Person(s) empowered or selected under subsection (b)
above to determine whether Indemnitee is entitled to indemnification shall not
have made a determination within 30 days after receipt by the Company of the
request therefore, the requisite determination of entitlement to indemnification
shall be deemed to have been made in favor of the Indemnitee, and he shall be
entitled to such indemnification, absent (i) an intentional misstatement by
Indemnitee of a material fact, or an intentional omission of a material fact
necessary to make Indemnitee's statement not materially misleading, in
connection with the request for indemnification; or (ii) a prohibition of such
indemnification under applicable law; provided, however, that such 30-day period
may be extended for a reasonable time, not to exceed an additional 15 days, if
the Person(s) making such determination reasonably and in good faith requires
such additional time to complete the obtaining or evaluation of documentation
and/or information relating thereto.

            (h)   Indemnitee shall reasonably cooperate with the Person(s)
making the determination regarding his entitlement to indemnification, including
providing to such Person(s) upon reasonable advance request any documentation or
information which is not privileged or otherwise protected from disclosure and
which is reasonably available to Indemnitee and reasonably necessary to such
determination. Any Independent Counsel or member of the board of directors of
the Company shall act reasonably and in good faith in making a determination of
Indemnitee's entitlement to indemnification hereunder. Any Expenses incurred by
Indemnitee in so cooperating with the Person(s) making such determination shall
be borne by the Company (irrespective of the determination as to Indemnitee's
entitlement to indemnification), and the Company hereby agrees to indemnify and
hold harmless Indemnitee therefrom.

      8.    REMEDIES.

            (a)   If: (i) a determination is made pursuant to Section 7 that
Indemnitee is not entitled to indemnification under this Agreement; (ii)
advancement of Expenses is not timely

                                        7


made pursuant to Section 6; (iii) contribution is not made pursuant to Section
4; (iv) no determination of entitlement to indemnification is made pursuant to
Section 7 within 90 days after receipt by the Company of the request for
indemnification; (v) payment of indemnification pursuant to this Agreement is
not made within ten days of the receipt by the Company of a written request
therefore; (vi) payment of indemnification is not made within ten days after a
determination has been made that Indemnitee is entitled to indemnification or
such determination is deemed to have been made pursuant to Section 7; or (vii)
the Company has not complied with any other term of this Agreement intended for
the benefit of Indemnitee, then in any such event, Indemnitee shall be entitled
to an adjudication of the foregoing in an appropriate court in Maryland, or in
any other court of competent jurisdiction. The Company shall not oppose
Indemnitee's right to seek any such adjudication.

            (b)   If a determination shall have been made pursuant to Section 7
that Indemnitee is not entitled to indemnification, any judicial proceeding
commenced pursuant to this Section 8 shall be conducted in all respects as a de
novo trial, on the merits, and Indemnitee shall not be prejudiced by reason of
that adverse determination.

            (c)   If a determination shall have been made pursuant to Section 7
that Indemnitee is entitled to indemnification, the Company shall be bound by
such determination in any judicial proceeding commenced pursuant to this Section
8, absent a prohibition of such indemnification under applicable law.

            (d)   If Indemnitee, pursuant to this Section 8, seeks a judicial
adjudication of his rights under, or to recover damages for breach of, this
Agreement, or to recover under any directors' and officers' liability insurance
policies maintained by the Company, the Company shall pay on his behalf, in
advance, any and all Expenses incurred by him in such judicial adjudication,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advancement of expenses or insurance recovery.

            (e)   The Company shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 8 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Company are bound by all the provisions of
this Agreement.

      9.    NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION.

            (a)   The rights of indemnification, advancement or contribution set
forth in this Agreement shall not be deemed exclusive of any other rights to
which Indemnitee may at any time be entitled under applicable law, the Charter
of the Company, the By-Laws of the Company or any other agreement to which the
Indemnitee, the Company or any Affiliates of the Company is a party. No
amendment, alteration or repeal of this Agreement or any provision hereof shall
limit or restrict any right of Indemnitee under this Agreement in respect of any
action taken or omitted by Indemnitee as a function of his Corporate Status
prior to such amendment, alteration or repeal. To the extent that a change in
the law, whether by statute or judicial decision, permits greater
indemnification, advancement or contribution rights than

                                        8


currently are afforded under the Charter of the Company, the By-Laws of the
Company and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy conferred herein is intended to be exclusive of
any other right or remedy of Indemnitee, and every other right or remedy shall
be cumulative and in addition to every other right or remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder shall not prevent the concurrent
assertion or employment of any other right or remedy.

            (b)   To the extent that the Company maintains an insurance policy
or policies providing liability insurance for a director, officer, partner,
employee, trustee, agent, attorney-in-fact or fiduciary of any Company Entity or
of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such Person serves at the request of any Company
Entity, Indemnitee shall be covered by such policy or policies in accordance
with its or their terms to the maximum extent of the coverage available for any
such director, officer, partner, employee, trustee, agent, attorney-in-fact or
fiduciary under such policy or policies. If, at the time of a request for
indemnification under this Agreement, the Company has such a policy or policies
in effect, the Company shall give prompt notice of the commencement of a
Proceeding to the insurers in accordance with the procedures set forth in the
respective policy or policies. The Company shall thereafter take all necessary
or desirable action to cause such insurers to pay, on behalf of the Indemnitee,
all amounts payable as a result of such Proceeding in accordance with the
provisions of such policy or policies.

            (c)   In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.

            (d)   The Company shall not be liable under this Agreement to make
any payment of amounts otherwise indemnifiable hereunder if and to the extent
that Indemnitee otherwise and actually has received such payment under any
insurance policy, contract, agreement or otherwise.

      10.   DURATION OF AGREEMENT.

      All agreements and obligations of the Company contained herein shall
continue with respect to Indemnitee during the period in which he serves as a
director, officer, partner, employee, trustee, agent, attorney-in-fact or
fiduciary of any Company Entity (or is or was serving at the request of any
Company Entity as a director, officer, partner, employee, trustee, agent,
attorney-in-fact or fiduciary of another corporation, partnership, joint
venture, trust or other enterprise), whether or not such service occurred prior
to or after the date this Agreement was effective, and shall continue in
perpetuity thereafter, whether or not Indemnitee is acting or serving in any
such capacity at the time any Expenses or Losses are incurred for which
indemnification, advancement or contribution can be provided under this
Agreement. This Agreement shall be binding upon, shall inure to the benefit of
and shall be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by

                                        9


purchase, merger, consolidation or otherwise to all or substantially all of the
business or assets of the Company), assigns, spouses, heirs, executors and
personal and legal representatives.

      11.   SECURITY.

      To the extent requested by Indemnitee and approved by the Company board of
directors, the Company may at any time and from time to time provide security to
Indemnitee for the obligations of the Company hereunder through an irrevocable
bank line of credit, funded trust or other collateral or by other means. Any
such security, once provided to Indemnitee, may not be revoked or released
without the prior written consent of such Indemnitee.

      12.   ENFORCEMENT; ENTIRE AGREEMENT.

            (a)   The Company expressly confirms and agrees that it has entered
into this Agreement and has assumed the obligations imposed on it hereby in
order to induce Indemnitee to serve or continue to serve as a director, officer,
partner, employee, trustee, agent, attorney-in-fact or fiduciary of any Company
Entity, and the Company acknowledges that Indemnitee is relying upon this
Agreement in agreeing to serve as a director, officer, partner, employee,
trustee, agent, attorney-in-fact or fiduciary of any Company Entity.

            (b)   Subject to Section 9, this Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings, oral, written and
implied, between the parties hereto with respect to the subject matter hereof,
except to the extent referenced in Section 9 hereof.

      13.   SEVERABILITY.

      If any provision of this Agreement shall be held by a court of competent
jurisdiction to be invalid, void, illegal or otherwise unenforceable for any
reason whatsoever: (i) the validity, legality and enforceability of the
remaining provisions of this Agreement (including each portion of any section of
this Agreement containing any such provision held to be invalid, illegal or
unenforceable that is not itself invalid, illegal or unenforceable) shall not be
affected or impaired in any way thereby and shall remain enforceable to the
fullest extent permitted by law; and (ii) to the fullest extent possible, the
provisions of this Agreement (including each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable that is not itself invalid, illegal or unenforceable) shall be
construed so as to give effect to the intent manifested thereby.

      14.   MODIFICATION AND WAIVER.

      No supplement, modification, waiver, termination or amendment of all or
any portion of this Agreement shall be binding unless expressed in a written
instrument executed by the parties hereto. No waiver of any term or provision of
this Agreement shall be deemed or shall constitute a waiver of any other term or
provision hereof (whether or not similar), and any such waiver shall be
effective only in the specific instance, for the specific duration and for the
express purpose for which it is given. Any waiver or failure to insist upon
strict compliance with any

                                       10


term or provision of this Agreement shall not operate as a waiver of, or an
estoppel with respect to, any subsequent or other failure to comply.

      15.   NOTICE OF SERVICE BY INDEMNITEE.

      Indemnitee agrees promptly to notify the Company in writing upon being
served with any summons, citation, subpoena, complaint, indictment or other
document relating to any Proceeding or matter which may be subject to
indemnification covered hereunder. The failure to so notify the Company shall
not relieve the Company of any obligations which it may have to Indemnitee under
this Agreement or otherwise.

      16.   NOTICES.

      All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if (i) delivered by and
receipted for by the party to whom said notice or other communication shall have
been directed; (ii) mailed by certified or registered mail with postage prepaid,
on the third business day after the date on which it is so mailed; or (iii) sent
by facsimile, the successful transmission and receipt of which is confirmed in a
written report; in each instance to the addresses and/or facsimile numbers set
forth below:

      (a)   If to Indemnitee, to:  Harold F. McElraft
                                   34 Meyersville Rd
                                   Chatham, NJ 07928
                                   Facsimile: (973) 635-4234

      (b)   If to the Company, to: Hanover Capital Mortgage Holdings, Inc.
                                   379 Thornall Street
                                   Edison, New Jersey 08837
                                   Attention: General Counsel
                                   Facsimile: (732) 548-0286

or to such other address or facsimile number as may have been furnished to
Indemnitee by the Company, as the case may be.

      17.   IDENTICAL COUNTERPARTS.

      This Agreement may be executed in one or more counterparts, each of which
shall for all purposes be deemed to be an original but all of which together
shall constitute one and the same agreement. Only one such counterpart signed by
the party against whom enforceability is sought needs to be produced to evidence
the existence of this Agreement.

      18.   HEADINGS.

      The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect the construction or interpretation thereof.

                                       11


      19.   GOVERNING LAW.

      The parties agree that this Agreement shall be governed by, and construed
and enforced in accordance with, the laws of Maryland without application of the
conflict of laws principles thereof.

      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

                                           HANOVER CAPITAL MORTGAGE
                                           HOLDINGS, INC.

                                           By: /s/ John A. Burchett
                                               -------------------------------
                                               John A. Burchett
                                               President and CEO

                                           INDEMNITEE

                                           /s/ Harold F. McElraft
                                           -----------------------------------
                                           Harold F. McElraft

                                       12

EX-31.1

                                                                    EXHIBIT 31.1

      CERTIFICATION BY JOHN A. BURCHETT PURSUANT TO SECURITIES EXCHANGE ACT
    RULE 13A-14(A), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
                                   ACT OF 2002

I, John A. Burchett, certify that:

      1. I have reviewed this Quarterly Report on Form 10-Q of Hanover Capital
Mortgage Holdings, Inc.;

      2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

      4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:

            a) designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared; and

            b) designed such internal control over financial reporting, or
      caused such internal control over financial reporting to be designed under
      our supervision, to provide reasonable assurance regarding the reliability
      of financial reporting and the preparation of financial statements for
      external purposes in accordance with generally accepted accounting
      principles; and

            c) evaluated the effectiveness of the registrant's disclosure
      controls and procedures and presented in this report our conclusions about
      the effectiveness of the disclosure controls and procedures, as of the end
      of the period covered by this report based on such evaluation; and

            d) disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, the registrant's control over financial
      reporting.

      5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

            a) all significant deficiencies and material weaknesses in the
      design or operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

            b) any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's internal
      control over financial reporting.

                                           /s/ John A. Burchett
                                           ---------------------------------
                                           John A. Burchett
                                           President and Chief Executive Officer

Date: May 16, 2005

EX-31.2

                                                                    EXHIBIT 31.2

     CERTIFICATION BY HAROLD F. MCELRAFT PURSUANT TO SECURITIES EXCHANGE ACT
           RULE 13A-14(A), AS ADOPTED PURSUANT TO SECTION 302 OF THE
                           SARBANES-OXLEY ACT OF 2002

I, Harold F. McElraft, certify that:

      1. I have reviewed this Quarterly Report on Form 10-Q of Hanover Capital
Mortgage Holdings, Inc.;

      2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

      4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:

            a) designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared; and

            b) designed such internal control over financial reporting, or
      caused such internal control over financial reporting to be designed under
      our supervision, to provide reasonable assurance regarding the reliability
      of financial reporting and the preparation of financial statements for
      external purposes in accordance with generally accepted accounting
      principles; and

            c) evaluated the effectiveness of the registrant's disclosure
      controls and procedures and presented in this report our conclusions about
      the effectiveness of the disclosure controls and procedures, as of the end
      of the period covered by this report based on such evaluation; and

            d) disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, the registrant's control over financial
      reporting.

      5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

            a) all significant deficiencies and material weaknesses in the
      design or operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

            b) any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's internal
      control over financial reporting.

                                           /s/ Harold F. McElraft
                                           ---------------------------------
                                           Harold F. McElraft
                                           Chief Financial Officer and Treasurer

Date: May 16, 2005

EX-32.1

                                                                    EXHIBIT 32.1

            HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
                           CERTIFICATIONS PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

John A. Burchett, President and Chief Executive Officer, and Harold F. McElraft,
Chief Financial Officer and Treasurer, of Hanover Capital Mortgage Holdings,
Inc. (the "Company"), certify to each such officer's knowledge, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that:

1.    The Quarterly Report on Form 10-Q of the Company for the quarter ended
      March 31, 2005 (the "Report") fully complies with the requirements of
      Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

2.    The information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.

Date: May 16, 2005                    By:  /s/ JOHN A. BURCHETT
                                           -------------------------------------
                                           John A. Burchett
                                           President and Chief Executive Officer

Date: May 16, 2005                    By:  /s/ HAROLD F. MCELRAFT
                                           -------------------------------------
                                           Harold F. McElraft
                                           Chief Financial Officer and Treasurer

A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.