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 September 30, 2007

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

200 Metroplex Drive, Suite 100, Edison, New Jersey 08817
(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o      Accelerated filer o      Non-accelerated filer þ

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

The registrant had 8,663,962 shares of common stock outstanding as of November 15, 2007.

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

FORM 10-Q
For the Nine Months Ended September 30, 2007

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006		2
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)		3
	Consolidated Statements of Other Comprehensive Income (Loss) for the Nine Months Ended September 30, 2007 and 2006 (unaudited)		4
	Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2007 (unaudited)		5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (unaudited)		6
	Notes to Consolidated Financial Statements (unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38
Item 4.	Controls and Procedures		42
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		43
Item 1A.	Risk Factors		43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 3.	Defaults Upon Senior Securities		46
Item 4.	Submission of Matters to a Vote of Security Holders		46
Item 5.	Other Information		46
Item 6.	Exhibits		46
Signatures			47
EX-10.31.15 Amended and Restated Master Loan Agreement, dated March 27, 2000
EX-10.38.11 Master Repurchase Agreement, dated as of August 10, 2007
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO & CFO

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

	September 30,
	2007			December 31,
	(Unaudited)			2006
Assets
Cash and cash equivalents	$	8,616		$	13,982
Accrued interest receivable		1,251			1,652
Mortgage loans
Collateral for CMOs		6,596			9,736
Mortgage securities ($143,598 and $254,482 pledged under Repurchase Agreements as of September 30, 2007 and December 31, 2006, respectively)
Trading		30,136			105,104
Available for sale		113,462			154,599
Held to maturity		—			6,254
		143,598			265,957
Other subordinate security, held to maturity		2,801			2,757
Equity investments in unconsolidated affiliates		1,482			1,399
Other assets		5,881			6,237
Assets of discontinued operations		—			2,549
	$	170,225		$	304,269
Liabilities
Repurchase agreements	$	107,256		$	193,247
Collateralized mortgage obligations (CMOs)		4,369			7,384
Dividends payable		—			1,236
Accounts payable, accrued expenses and other liabilities		5,300			2,757
Liability to subsidiary trusts issuing preferred and capital securities		41,239			41,239
Liabilities of discontinued operations		—			823
		158,164			246,686
Contingencies		—			—
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, 8,663,962 and 8,233,062 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively		86			82
Additional paid-in capital		102,933			102,598
Cumulative earnings (loss)		(33,573	)		8,699
Cumulative distributions		(57,385	)		(56,173	)
Accumulated other comprehensive income		—			2,377
		12,061			57,583
	$	170,225		$	304,269

See notes to consolidated financial statements

2

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues
Interest income	$	6,194		$	6,673		$	19,314		$	17,632
Interest expense		5,246			4,023			12,853			10,004
Net interest income before loan loss provision		948			2,650			6,461			7,628
Loan loss provision		—			—			—			—
Net interest income		948			2,650			6,461			7,628
(Loss) gain on sale of mortgage assets		(997	)		209			(803	)		834
(Loss) gain on mark to market of mortgage assets		(28,701	)		2,525			(43,325	)		206
(Loss) gain on freestanding derivatives		(633	)		(3,178	)		1,668			(1,857	)
Technology		230			538			946			2,438
Loan brokering and advisory services		—			—			157			105
Other income (loss)		(273	)		49			(381	)		(39	)
Total revenues		(29,426	)		2,793			(35,277	)		9,315
Expenses
Personnel		869			1,007			2,998			3,256
Legal and professional		410			668			1,368			2,197
General and administrative		256			247			1,276			869
Depreciation and amortization		154			178			461			528
Occupancy		80			92			233			234
Technology		104			212			413			947
Financing		256			120			558			324
Other		195			160			493			521
Total expenses		2,324			2,684			7,800			8,876
Operating income (loss)		(31,750	)		109			(43,077	)		439
Equity in income of unconsolidated affiliates		27			27			82			82
Minority interest in loss of consolidated affiliate		—			—			—			(5	)
Income (loss) from continuing operations before income tax provision (benefit)		(31,723	)		136			(42,995	)		526
Income tax provision (benefit)		—			—			—			(12	)
Income (loss) from continuing operations		(31,723	)		136			(42,995	)		538
Discontinued Operations
Income (loss) from discontinued operations before gain on sale and income tax provision		5			(53	)		(623	)		(299	)
Gain on sale of discontinued operations		—			—			1,346			—
Income tax provision from discontinued operations		—			—			—			—
Income (loss) from discontinued operations		5			(53	)		723			(299	)
Net Income (loss)	$	(31,718	)	$	83		$	(42,272	)	$	239
Net income (loss) per common share — Basic
Income (loss) from continuing operations	$	(3.83	)	$	0.02		$	(5.28	)	$	0.06
Income (loss) from discontinued operations		0.00			(0.01	)		0.09			(0.03	)
Net income (loss) per common share — Basic	$	(3.83	)	$	0.01		$	(5.19	)	$	0.03
Net income (loss) per common share — Diluted
Income (loss) from continuing operations	$	(3.83	)	$	0.02		$	(5.28	)	$	0.06
Income (loss) from discontinued operations		0.00			(0.01	)		0.09			(0.03	)
Net income (loss) per common share — Diluted	$	(3.83	)	$	0.01		$	(5.19	)	$	0.03
Weighted average shares outstanding — Basic		8,283,536			8,280,041			8,142,470			8,391,317
Weighted average shares outstanding — Diluted		8,283,536			8,287,603			8,142,470			8,398,689

See notes to consolidated financial statements

3

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
Net income (loss)	$	(42,272	)	$	239
Other comprehensive income (loss), net of tax effect of $0:
Net unrealized (loss) gain on mortgage securities classified as available-for-sale		(43,952	)		6,907
Reclassification adjustment for net (loss) gain included in net income		(384	)		1,326
Reclassification adjustment for impairment expense included in net income		41,959			—
Other comprehensive income (loss)		(2,377	)		8,233
Comprehensive income (loss)	$	(44,649	)	$	8,472

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)

																Accumulated
							Additional									Other
	Common Stock						Paid-In			Cumulative			Cumulative			Comprehensive
	Shares			Amount			Capital			Earnings (Loss)			Distributions			Income			Total
Balance December 31, 2006		8,233,062		$	82		$	102,598		$	8,699		$	(56,173	)	$	2,377		$	57,583
Amortization of deferred stock grant to key employees		—			—			82			—			—			—			82
Issuance of stock to key employees		29,000			—			—			—			—			—			—
Issuance of common stock in connection with financing		600,000			6			1,212			—			—			—			1,218
Repurchase of common stock		(194,100	)		(2	)		(958	)		—			—			—			(960	)
Forfeiture of unvested restricted stock		(4,000	)		—			(1	)		—			—			—			(1	)
Net income (loss)		—			—			—			(42,272	)		—			—			(42,272	)
Dividends declared		—			—			—			—			(1,212	)		—			(1,212	)
Other comprehensive income (loss)		—			—			—			—			—			(2,377	)		(2,377	)
Balance September 30, 2007		8,663,962		$	86		$	102,933		$	(33,573	)	$	(57,385	)	$	—		$	12,061

See notes to consolidated financial statements

5

HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
Operating Activities
Income (loss) from continuing operations	$	(42,995	)	$	538
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities of continuing operations:
Depreciation and amortization		461			528
Stock-based compensation		39			28
Accretion of net discount to interest income		(5,327	)		(4,211	)
Accretion of debt discount and deferred financing costs to interest expense		1,347			20
Loss (gain) recognized from mark to market of mortgage assets		43,325			(206	)
Undistributed earnings of unconsolidated affiliates — net		(82	)		(82	)
Minority interest in earnings (loss) of consolidated affiliate		—			(5	)
Loss (gain) on sale of mortgage assets		803			(834	)
Loss on disposition of real estate owned		72			72
Gain on mortgage loans paid in full		(86	)		—
Purchase of mortgage securities classified as trading		(30,187	)		(77,023	)
Principal collections on mortgage securities classified as trading		9,247			7,351
Proceeds from sale of mortgage securities classified as trading		94,216			45,860
Proceeds from sale of mortgage loans classified as held for sale		—			9,418
Principal collections on mortgage loans classified as held for sale		—			780
Decrease (increase) in accrued interest receivable		401			(232	)
Increase in other assets		(375	)		(481	)
(Decrease) increase in accounts payable, accrued expenses and other liabilities		(387	)		2,235
Net cash provided by (used in) operating activities of continuing operations		70,472			(16,244	)
Net cash provided by (used in) operating activities of discontinued operations		1,117			(12	)
Investing Activities
Purchase of mortgage securities classified as available for sale		(10,713	)		(70,777	)
Principal collections on mortgage securities classified as available for sale		1,149			1,072
Principal collections on mortgage securities classified as held to maturity		980			1,335
Principal collections on CMO collateral		3,245			2,980
Proceeds from sale of mortgage securities classified as available for sale		11,398			42,859
Proceeds from sale of mortgage securities classified as held to maturity		5,129			—
Proceeds from disposition of real estate owned		623			1,202
Cash paid for acquisitions		—			(118	)
Net cash provided by (used in) investing activities of continuing operations		11,811			(21,447	)
Proceeds from the sale of HCP		1,375			—
Financing Activities
(Decrease) increase in borrowings using Repurchase Agreements		(163,872	)		36,395
Increase in borrowings using fixed-term financing		80,932			—
Payments on CMOs		(3,015	)		(2,734	)
Payment of debt issuance costs		(778	)		—
Payment of dividends		(2,448	)		(5,459	)
Repurchase of common stock		(960	)		(1,324	)
Net cash (used in) provided by financing activities of continuing operations		(90,141	)		26,878
Net decrease in cash and cash equivalents		(5,366	)		(10,825	)
Cash and cash equivalents at beginning of period		13,982			30,492
Cash and cash equivalents at end of period	$	8,616		$	19,667

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 specialty finance company whose principal business is to generate net interest income on its portfolio of prime mortgage loans and mortgage securities backed by prime mortgage loans on a leveraged basis. Hanover avoids investments in sub-prime loans or securities collateralized by sub-prime loans. The Company leverages its purchases of mortgage securities with borrowings obtained primarily through the use of sales with agreements to repurchase the securities (“Repurchase Agreements”). Historically, the Repurchase Agreements were on a 30-day revolving basis and, for the majority of the Company’s investments, are currently under a single Repurchase Agreement for a one-year fixed term basis. Hanover conducts its operations as a real estate investment trust, or REIT, for federal income tax purposes. Hanover has one primary subsidiary, Hanover Capital Partners 2, Ltd. (“HCP-2”). When we refer to the “Company”, we mean Hanover together with its consolidated subsidiaries.

     Prior to 2007, mortgage industry service and technology related income was earned through two separate divisions in HCP-2, Hanover Capital Partners (“HCP”) and HanoverTrade (“HT”). Effective January 12, 2007, the assets of HCP’s due diligence business, representing substantially all of the assets of HCP, were sold to Terwin Acquisition I, LLC (now known as Edison Mortgage Decisioning Solutions, LLC) (the “Buyer”), which also assumed certain liabilities related thereto. As a result, the net assets and liabilities and results of operations of HCP have been presented as discontinued operations in the accompanying financial information and financial statements in this Form 10-Q.

     The Company’s principal executive offices are located at 200 Metroplex Drive, Suite 100, Edison, NJ 08817. The Company also maintains an office at 55 Broadway, Suite 3002, New York, NY 10006.

     Through August 9, 2007, the Company’s lenders regularly required the Company to repay a portion of amounts borrowed under its then existing Repurchase Agreements with respect to its portfolio of subordinate mortgage-backed securities. These repayment requirements arose from decreases in the market prices of the Company’s subordinate mortgage-backed securities used by the lenders to determine the amounts to be financed. These decreases were due to unfavorable market conditions for Hanover’s portfolio of securities and decreases in borrowing percentages from certain lenders. Although no lender terminated its Repurchase Agreement facility with the Company in the period prior to August 9, 2007, these repayments were a significant drain on the Company’s available cash. The increasing frequency and amount of required repayments in the period immediately prior to August 9, 2007 posed a threat to the Company’s ability to maintain its portfolio of subordinate mortgage-backed securities.

     On August 10, 2007, the Company entered into a one-year Master Repurchase Agreement and related Annex I thereto (as amended on October 3, 2007 and November 13, 2007) with RCG PB, Ltd., an affiliate of Ramius Capital Group, LLC (“Ramius”), in connection with a repurchase transaction with respect to its portfolio of subordinate mortgage-backed securities (the “Repurchase Transaction”) (See Note 8 for additional information). The current operations of the Company under this Repurchase Transaction are not cash flow positive. At the termination of the agreement on August 9, 2008, the Company is required to repay the outstanding principal through cash or in-kind securities. The Company is seeking additional capital and is in discussions with potential investors, but no commitments or agreements have been reached. Additional sources of capital are required for the Company to generate positive cash flow and continue operations in the medium-term, including retiring the outstanding financing from the Repurchase Transaction.

     On August 15, 2007, the Company sold its entire portfolio of whole-pool Fannie Mae and Freddie Mac mortgage-backed securities (“Agency MBS”). This portfolio was held primarily to meet certain exemptive provisions of the Investment Company Act of 1940 (the “40 Act”). The sales were necessary in order to generate some liquidity and close existing borrowing positions with lenders that was a condition of the consummation of the Repurchase Transaction. On August 29, 2007, the Company separately financed the acquisition of approximately $30 million of Agency MBS with a 30-day revolving Repurchase Agreement. As a result, the Company maintained compliance with the 40 Act during the quarter ended September 30, 2007.

7

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 of America (“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 three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2007. 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, 2006.

Elimination of Segment Report

     For the year ended December 31, 2006 and prior periods, the Company reported results of operations for three segments; Hanover, HCP and HT. As a result of the sale of HCP and the significant decrease in the operations of HT in 2006 and the beginning of 2007, the Company now has only one reporting segment.

Valuation of Mortgage Securities

     Historically, the Company has determined the estimated fair value of its Subordinate MBS portfolio using an enhanced proprietary valuation model it developed. The Company’s Subordinate MBS are not readily marketable with quoted market prices. The Company has previously conducted comparisons of its recent Subordinate MBS sales and the attributes of these sales to the estimates and attributes determined by the model and has determined the model is an accurate indicator of fair value.

     However, as a consequence of limited trading and a distressed market for the securities in the Company’s portfolio during the third quarter of 2007 and through the date of this report, the fair market values underpinning the Company’s market valuation adjustments are based on facts that are far less certain than has historically been the case. Although the Company believes the inherent assumptions underlying the model are still relevant in the current market, there are no trades in the market place to utilize as a reference or comparison and therefore, the securities are not subject to valuation based on observable market transactions. As a result of this uncertainty and the distressed nature of the market, the Company modified its process for determining the estimated market value of its Subordinate MBS to use only inputs from third parties.

     The Company obtained estimated values or marks prepared by a third party pricing service and from various dealers as an indicator in the current market. For both of these sources, the estimations of values are based on a variety of assumptions (including probable modeling and, as to the pricing service, marks and inputs from various sources) they do not share and could prove to be inaccurate.

     The Company determined the estimated market value of its securities using the marks from the third party pricing service and where a mark from the service was not available, marks from the dealers were used.

     The Company believes the estimated market values determined through the above process reasonably reflect the values it may have been able to receive as of September 30, 2007, should it have chosen to sell them. These estimates involve uncertainty and approximations and, as a result, amounts realized in actual sales could differ significantly from the fair values determined.

     The table below is a summary of the source of the prices used.

Source of Marks	Percent of Total
Dealers		4	%
Pricing Service		96	%
		100	%

8

Recent Accounting Pronouncements

     In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments”, which allows any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, to be carried at fair value in its entirety, with changes in fair value recognized in earnings. In addition, SFAS No. 155 requires that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or contain an embedded derivative. SFAS No. 155 also eliminates a prior restriction on the types of passive derivatives that a qualifying special purpose entity is permitted to hold. SFAS No. 155 is applicable for new or modified financial instruments and is effective for fiscal years beginning after September 15, 2006. The Company adopted this pronouncement as of January 1, 2007, and it did not have a significant impact on the Company’s financial position or results of operations.

     In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement attribute for income tax positions taken or expected to be taken in a tax return. In addition, this pronouncement provides guidance on derecognition, classification, penalties and interest, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted this pronouncement as of January 1, 2007, and it did not have a significant impact on the Company’s financial position or results of operations.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which establishes a framework for measuring fair value in GAAP, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and is to be applied prospectively as of the fiscal year of adoption. The Company’s management is currently evaluating the potential impact of this pronouncement and does not believe the adoption will have a material impact on the Company’s consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company’s management is currently evaluating the potential impact of this pronouncement and does not believe the adoption will have a significant impact on the Company’s consolidated financial statements.

     In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 07-1: Clarification of the Scope of the Audit and Accounting Guide “Investment Companies” and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. This pronouncement provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide “Investment Companies”. Entities that are within the scope of this Audit and Accounting Guide are subject to specialized reporting requirements, including recording all investments at fair value. This pronouncement is effective for fiscal years beginning on or after December 15, 2007. However, at a recent meeting, the FASB has issued a Proposed FASB Staff Position, FSP
SOP 07-1-a, that would delay indefinitely the effective date of the SOP and prohibit adoption of the SOP for an entity that has not early adopted the SOP. No official guidance has been issued regarding this deferral. Management of the Company is currently reviewing this pronouncement and the proposed FSP and its potential deferral to determine the impact, if any, to the Company.

9

3. Sale of HCP — Discontinued Operations

     Effective January 12, 2007, the Company sold its due diligence business, HCP, to Terwin Acquisition I, LLC (now known as Edison Mortgage Decisioning Solutions, LLC). The sale included certain assets and the assumption of certain liabilities of the Company’s wholly-owned subsidiary, HCP-2, and included all of the Company’s due diligence operations. A summary of the assets sold and liabilities assumed by Buyer is as follows (dollars in thousands):

Receivables	$	129
Fixed assets		247
Other assets		57
Other liabilities		(658	)
	$	(225	)

     The total purchase price of $1,375,000 represented a premium of $1,600,000 over the net book value of the assets sold and liabilities assumed of $(225,000). The Company recognized a gain on the sale of approximately $1,346,000, after deducting certain transaction fees and the write-off of intangible assets. The Company retained approximately $2,051,000 of accounts receivables and other receivables of HCP at the date of the sale.

     As a result of the sale, the Company will no longer perform due diligence activities for third parties. The Company does not have any continuing involvement in HCP, nor does the Company have a direct financial ownership investment in HCP. The Company performed certain services to assist Buyer with the transition of the business. These services terminated on May 11, 2007.

     In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-lived Assets”, the related financial information for HCP is reported as discontinued operations for all periods presented.

     The following is a summary of the results of operations of the discontinued operations of the HCP business (amounts in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007(1)			2006			2007(1)		2006
Revenues	$	—		$	3,044		$	449	$	8,751
Gain on sale of HCP		—			—			1,346		—
Operating expenses		(5	)		3,097			1,072		9,050
Income (loss) from discontinued operations before income tax provision		5			(53	)		723		(299	)
Income tax provision		—			—			—		—
Income (loss) from discontinued operations	$	5		$	(53	)	$	723	$	(299	)

(1) Inclusive of normal operations up to January 12, 2007, and activities incidental to concluding the sale subsequent to January 12, 2007.

4. Earnings Per Share

     Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock that then shared in earnings and losses. Shares issued during the period and shares reacquired during the period are weighted for the period they were outstanding.

10

     The components of the computation of basic and diluted earnings (loss) per share are as follows (dollars in thousands, except per share data):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007			2006
Basic earnings (loss) per share:
Income (loss) from continuing operations (numerator)	$	(31,723	)	$	136	$	(42,995	)	$	538
Weighted-average common shares outstanding (denominator)		8,283,536			8,280,041		8,142,470			8,391,317
Basic earnings (loss) per share	$	(3.83	)	$	0.02	$	(5.28	)	$	0.06
Diluted earnings (loss) per share:
Income (loss) from continuing operations (numerator)	$	(31,723	)	$	136	$	(42,995	)	$	538
Weighted-average common shares outstanding		8,283,536			8,280,041		8,142,470			8,391,317
Add: Incremental common shares from assumed conversion of stock options		—			7,562		—			7,372
Diluted weighted-average common shares outstanding (denominator)		8,283,536			8,287,603		8,142,470			8,398,689
Diluted (loss) earnings per share	$	(3.83	)	$	0.02	$	(5.28	)	$	0.06

     The calculation of diluted earnings (loss) per share for the three and nine months ended September 30, 2007, does not include 213,522 and 230,464, respectively, potential common shares that were anti-dilutive. The calculation of diluted earnings (loss) per share for the three and nine months ended September 30, 2006, does not include 268,324 potential common shares that were anti-dilutive.

5. Mortgage Loans

Mortgage Loans — Collateral for CMOs
(dollars in thousands)

	September 30, 2007									December 31, 2006
	Fixed			Adjustable						Fixed			Adjustable
	Rate			Rate			Total			Rate			Rate			Total
Principal balance	$	1,400		$	5,499		$	6,899		$	1,932		$	8,217		$	10,149
Net (discount) and deferred financing costs		(24	)		(95	)		(119	)		(26	)		(113	)		(139	)
Loan loss allowance		(37	)		(147	)		(184	)		(52	)		(222	)		(274	)
Carrying value	$	1,339		$	5,257		$	6,596		$	1,854		$	7,882		$	9,736

     The following table summarizes the activity in the loan loss allowance for mortgage loans securitized as collateral in outstanding CMOs:

	Three Months					Nine Months
	Ended					Ended
	September 30,					September 30,
	2007			2006		2007			2006
Balance, beginning of period	$	198		$	284	$	274		$	284
Loan loss provision		—			—		—			—
Charge-offs		—			—		(4	)		—
Mortgage loans paid in full		(14	)		—		(86	)		—
Balance, end of period	$	184		$	284	$	184		$	284

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6. Mortgage Securities

Mortgage Securities Classified as Trading
(dollars in thousands)

	September 30, 2007								December 31, 2006
				Not								Not
	Pledged			Pledged		Total			Pledged			Pledged		Total
Principal balance	$	30,045		$	—	$	30,045		$	106,479		$	—	$	106,479
Net premium (discount)		116			—		116			(2,251	)		—		(2,251	)
Amortized cost		30,161			—		30,161			104,228			—		104,228
Gross unrealized gain		—			—		—			1,672			—		1,672
Gross unrealized loss		(25	)		—		(25	)		(796	)		—		(796	)
Carrying value	$	30,136		$	—	$	30,136		$	105,104		$	—	$	105,104

Mortgage Securities Classified as Available for Sale
(dollars in thousands)

	September 30, 2007								December 31, 2006
				Not								Not
	Pledged			Pledged		Total			Pledged			Pledged			Total
Principal balance	$	227,934		$	—	$	227,934		$	221,756		$	8,995		$	230,751
Impairment recognized		(42,823	)		—		(42,823	)		(743	)		—			(743	)
Net premium (discount)		(71,649	)		—		(71,649	)		(74,073	)		(3,713	)		(77,786	)
Amortized cost		113,462			—		113,462			146,940			5,282			152,222
Gross unrealized gain		—			—		—			3,710			9			3,719
Gross unrealized loss		—			—		—			(1,272	)		(70	)		(1,342	)
Carrying value	$	113,462		$	—	$	113,462		$	149,378		$	5,221		$	154,599

     As of September 30, 2007, the gross unrealized loss in mortgage securities classified as available for sale is considered by management of the Company to be other-than-temporary impairments. Although these declines appear to be attributable to increases in market interest rates and credit spreads and possibly from changes in the loss or prepayment assumptions affecting cash flows, the turmoil in the industry appears to be much greater than the normal cyclical swings. Management of the Company is unable to predict when a recovery will occur and the level of recovery. In addition, the Company may not have sufficient funds to retire or refinance the outstanding principal under the Repurchase Transaction upon termination of the financing on August 9, 2008 and may be required to sell securities to settle the outstanding principal, which could be before a full recovery of the market has occurred. As a result, the Company recorded the difference between the adjusted cost basis and the fair value at September 30, 2007, determined on a security by security basis, as impairment expense of approximately $30,155,000 and $41,959,000 expense for the three and nine months ended September 30, 2007, respectively.

Mortgage Securities Classified as Held to Maturity
(dollars in thousands)

	September 30, 2007						December 31, 2006
			Not						Not
	Pledged		Pledged		Total		Pledged		Pledged		Total
Principal balance	$	—	$	—	$	—	$	—	$	5,845	$	5,845
Net premium		—		—		—		—		409		409
Amortized cost		—		—		—		—		6,254		6,254
Gross unrealized gain		—		—		—		—		—		—
Gross unrealized loss		—		—		—		—		—		—
Carrying value	$	—	$	—	$	—	$	—	$	6,254	$	6,254

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Other Subordinate Security Classified as Held to Maturity
(dollars in thousands)

	September 30, 2007								December 31, 2006
			Not								Not
	Pledged		Pledged			Total			Pledged		Pledged			Total
Principal balance	$	—	$	3,812		$	3,812		$	—	$	3,812		$	3,812
Impairment recognized		—		(12	)		(12	)		—		(6	)		(6	)
Net (discount)		—		(999	)		(999	)		—		(1,049	)		(1,049	)
Amortized cost		—		2,801			2,801			—		2,757			2,757
Gross unrealized gain		—		—			—			—		—			—
Gross unrealized loss		—		—			—			—		—			—
Carrying value	$	—	$	2,801		$	2,801		$	—	$	2,757		$	2,757

All Mortgage and Other Subordinate Securities by Collateral Type
(dollars in thousands)

	Trading				Available for Sale				Held to Maturity
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2007		2006		2007		2006		2007		2006
Fixed-Rate Agency Mortgage-Backed Securities	$	30,136	$	105,104	$	—	$	—	$	—	$	6,254
Fixed-Rate Subordinate Mortgage-Backed Securities		—		—		31,995		40,515		—		—
Fixed-Rate Other Subordinate Security		—		—		—		—		2,801		2,757
Adjustable-Rate Subordinate Mortgage-Backed Securities		—		—		81,467		114,084		—		—
Carrying value of mortgage and other subordinate securities	$	30,136	$	105,104	$	113,462	$	154,599	$	2,801	$	9,011

7. Other Assets

     The following is a breakdown of other assets (dollars in thousands):

	September 30, 2007		December 31, 2006
Prepaid expenses and other assets	$	2,950	$	2,837
Deferred financing cost		2,618		2,154
Capitalized software, net		286		458
Real Estate Owned		27		788
	$	5,881	$	6,237

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8. Repurchase Agreements and Other Liabilities

     Information pertaining to individual Repurchase Agreement lenders as of September 30, 2007 is as follows (dollars in thousands):

	Committed		December 31,					September 30,		Carrying Value
	Borrowing		2006		Net			2007		of Underlying
Lender	Limit		Balance		Change			Balance		Collateral		Type of Collateral
Lender A	$	200,000	$	—	$	—		$	—	$	—	Mortgage Loans
Lender B		20,000		8,427		(7,788	)		639		937	Retained CMO Securities, Mortgage Securities
Lender B		—		6,782		(6,782	)		—		—	Mortgage Securities
Lender C		—		12,523		(12,523	)		—		—	Mortgage Securities
Lender D		—		3,803		(3,803	)		—		—	Mortgage Securities
Lender E		—		112,388		(83,645	)		28,743		30,136	Mortgage Securities
Lender F		—		15,964		(15,964	)		—		—	Mortgage Securities
Lender G		—		5,646		(5,646	)		—		—	Mortgage Securities
Lender H		—		761		(761	)		—		—	Mortgage Securities
Lender I		—		668		(668	)		—		—	Mortgage Securities
Lender J		—		12,193		(12,193	)		—		—	Mortgage Securities
Lender K		—		11,583		(11,583	)		—		—	Mortgage Securities
Lender L		—		104		(104	)		—		—	Mortgage Securities
Lender M		—		2,405		(2,405	)		—		—	Mortgage Securities
Lender N		—		—		77,874			77,874		113,462	Mortgage Securities
Total			$	193,247	$	(85,991	)	$	107,256	$	144,535

     As of September 30, 2007, the weighted-average borrowing rate on the Company’s Repurchase Agreements for its Agency MBS portfolio was 5.80%, for its retained CMO security was 7.56% and for its Subordinate MBS portfolio was 22.21%.

     On June 22, 2006, the Company entered into a master repurchase agreement with Lender A for up to $200 million (the “Agreement”). The Company will utilize the facility primarily for financing the purchase of prime residential whole mortgage loans. Pursuant to the terms of the Agreement, the Company will pay interest to Lender A, based on the one-month London Interbank Offered Rate Index (“LIBOR”) plus an interest rate margin tied to a formula for each tranche of mortgage loans financed, plus various facility fees. The Company is required to maintain $5.0 million of cash and cash equivalents on hand at all times and a minimum level of tangible net worth, as defined in the Agreement. In addition, the Company is required to meet certain monthly net income requirements, as defined in the Agreement. The facility established by the Agreement will expire on June 22, 2011.

     The committed borrowing amount for Lender B was renewed in July 2007 for a committed borrowing amount of $20 million and a term of one year.

     In connection with the two committed borrowing facilities, the Company is required to maintain certain levels of cash and cash equivalents, tangible net worth, debt to tangible net worth and profitability. As of September 30, 2007, the Company was not in compliance with two of the covenants of the financing facility with Lender B. The Company’s agreement with Lender B provides that the Company shall insure that, at all times, it maintains Tangible Net Worth of not less than $56,000,000, of which a minimum of $38,000,000 shall be comprised of Stockholders’ Equity (the “Maintenance of Tangible Net Worth Covenant”). In October 2007, the Company, at no cost, obtained a waiver of the Maintenance of Tangible Net Worth Covenant from Lender B for the duration of 2007. In addition, as of September 30, 2007, the Company’s tangible net worth, as defined in the financing facility with Lender A, is below the contractual level which allows the Company to finance the purchase of prime residential mortgage loans. Although Lender A has not yet notified the Company that it intends to exercise any remedies due to the Company’s failure to maintain the required tangible net worth, such failure is a Static Pool Event under the agreement and essentially prohibits drawing funds under the agreement without a waiver or cure of the covenant.

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     On August 10, 2007, the Company entered into a Master Repurchase Agreement and related Annex I thereto (as amended on October 3, 2007 and November 13, 2007) with RCG PB, Ltd, an affiliate of Ramius Capital Group, LLC (Lender N), in connection with a repurchase transaction with respect to its portfolio of subordinate mortgage-backed securities. The purchase price of the securities in the Repurchase Transaction was $80,932,928. The fixed term of the Repurchase Transaction is one (1) year and contains no margin or call features. The Repurchase Transaction replaced substantially all of the Company’s outstanding Repurchase Agreements, both committed and non-committed, which previously financed the Company’s subordinate mortgage-backed securities. However, the Amended and Restated Master Loan and Security Agreement by and between Greenwich Capital Financial Products, Inc. (Lender B) and the Company dated March 27, 2000, as amended, remains in place, as does the Company’s Master Repurchase Agreement dated June 22, 2006, by and between the Company and Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main Company (Lender A).

     Pursuant to the Repurchase Transaction, the Company will pay interest monthly at the annual rate of approximately 12%. Other consideration includes all principal payments received on the underlying mortgage securities during the term of the Repurchase Transaction, a premium payment at the termination of the Repurchase Transaction and an agreement to issue 600,000 shares of the Company’s common stock (equal to approximately 7.4% of the Company’s outstanding equity), all of which have been issued.

     If the Company defaults under the Repurchase Transaction, Ramius has customary remedies, including demanding that all assets be repurchased by the Company and retaining and/or selling the assets.

     Per the terms of the Repurchase Transaction, the repurchase price for the securities on the repurchase date of August 9, 2008, assuming no event of default has occurred prior thereto, shall be an amount equal to the excess of (A) the sum of (i) the original purchase price of $80,932,928, (ii) $9,720,000, and (iii) $4,000,000 over (B) the excess of (i) all interest actually paid on the purchased securities (whether or not held by the Buyer), since August 10, 2007, over (ii) the sum of the “Monthly Additional Purchase Price Payments” (as defined below) paid by Ramius to the Company since August 10, 2007. The “Monthly Additional Purchase Price Payment” means, for each “Monthly Additional Purchase Price Payment Date”, which is further defined as the second Business day following the 25^th calendar day of each month prior to the Repurchase Date, an amount equal to the excess of (A) all interest actually paid on the purchased securities (whether or not held by the Buyer), since the preceding Monthly Additional Purchase Price Payment Date (or in the case of the first Monthly Additional Purchase Price Payment Date, August 10, 2007) over (B) $810,000.

9. Derivative Instruments

     Interest rate caps are used to economically hedge the changes in interest rates of the Company’s repurchase borrowings. As a result of the Company’s establishment of fixed-rate financing for its subordinate mortgage backed securities on August 10, 2007 pursuant to the Repurchase Transaction, the notional amount of the interest rate caps exceed the underlying borrowing exposure. However, the Company’s potential loss exposure for these instruments is limited to the fair market value of approximately $3,000 at September 30, 2007.

     Forward contracts are used to economically hedge the Company’s asset position in whole-pool Fannie Mae and Freddie Mac mortgage-backed securities (“Agency MBS”). As of September 30, 2007, the fair value of the Company’s forward sales contracts was an asset of approximately $216,000.

Components of Income From Freestanding Derivatives
(dollars in thousands)

	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2007			2006			2007			2006
Mark to market and settlements on forward contracts	$	(625	)	$	(3,062	)	$	1,691		$	(1,760	)
Mark to market on interest rate caps		(8	)		(116	)		(23	)		(97	)
Net gain on freestanding derivatives	$	(633	)	$	(3,178	)	$	1,668		$	(1,857	)

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10. Income Taxes

     Taxable income (loss) for the nine months ended September 30, 2007 is approximately $(362,000). Taxable income (loss) differs from net income (loss) because of timing differences (refers to the period in which elements of net income (loss) can be included in taxable income (loss)) and permanent differences (refers to an element of net income (loss) that must be included or excluded from taxable income (loss)).

     The following table reconciles net income (loss) to estimated taxable income (loss) for the nine months ended September 30, 2007 (dollars in thousands):

Net income (loss)	$	(42,272	)
Add (deduct) differences:
Mark to market of mortgage assets		42,516
Sale of mortgage securities		(107	)
Mark to market of freestanding derivatives		456
Net income in subsidiaries not consolidated for tax purposes — net		(1,311	)
Interest income and expense adjustments for sale of securities to Ramius		107
Other		249
Estimated taxable income (loss)	$	(362	)

     Excluded from the taxable income (loss) shown above is a loss on the sale of the securities to Ramius under the Repurchase Transaction of approximately $69,329,000. This taxable loss is deferred until either the Company exercises it right to repurchase the securities, in which case the loss becomes a component of the tax cost basis of the securities repurchased, or until the right to repurchase the securities expires, in which case the loss becomes realized and subject to capital loss limitations.

     Under the Repurchase Transaction, the Company and Ramius have agreed to treat the Repurchase Transaction as a sale of securities for U.S. federal income tax purposes. The Company and Ramius agreed to file all tax returns consistent with such intent and not to take any contrary position unless required by applicable law. Under the Repurchase Transaction the Company has the right, on August 9, 2008, to repurchase the securities under the Repurchase Transaction for approximately $85 million assuming all other conditions have been satisfied (“the Repurchase Right”). In addition, the Company has the right to receive Monthly Additional Repurchase Price Payments equal to the excess of all interest payments received on the securities under the Repurchase Transaction in excess of $810,000 (the “Monthly Payments Right”).

     If the Repurchase Transaction is treated as a sale of securities for federal income tax purposes, the Company will not be treated as owning the securities for the purposes of determining whether it has complied with the requirement under Section 856(c)(4) of the Internal Revenue Code that at least 75 percent of the value of its total assets are represented by real estate assets, cash, cash equivalents and Government securities at the end of each calendar quarter (“75% Requirement”). However, the Repurchase Right and the Monthly Payments Right would be considered assets for purposes of determining whether the Company satisfies the 75% Requirement.

     The Company intends to treat the Repurchase Right as a qualifying real estate asset for purposes of the 75% Requirement and to treat the Monthly Payments Right as a non-qualifying asset. Counsel has advised that it is uncertain whether the Repurchase Right constitutes a qualifying real estate asset for purposes of the 75% Requirement and that the Company’s position may not be upheld if challenged by the IRS. If the IRS were to deem that the Repurchase Right is not a qualifying asset for purposes of the 75% Requirement, and the value of the Repurchase Right together with other non-qualifying assets exceeds 25% of the Company’s assets, then the Company would not have satisfied the 75% Requirement for the quarter ended September 30, 2007, or in any future quarter in which the value of the Repurchase Right together with other non-qualifying assets exceeds 25% of the Company’s assets. The Company has obtained an independent valuation of the Repurchase Right under the Repurchase Transaction as of September 30, 2007. Based upon this valuation, the Company believes it has satisfied the 75% Requirement for the quarter ended September 30, 2007 even if the Repurchase Right is a non-qualifying asset. However, this valuation may be subject to challenge by the IRS, and there can be no assurance that the valuation would be upheld in the event of such challenge. Further, the value of the Repurchase Right is expected to increase each quarter as the exercise date of the Repurchase Right approaches. As a result, if the Repurchase Right were to be treated as a non-qualifying asset for the 75% Requirement, the Company may not be able to satisfy the 75% Requirement in future quarters based on the increasing values.

16

     If the Repurchase Transaction is treated as a sale of securities for federal income tax purposes, the Company will not be treated as receiving the income from the securities for the purposes of determining whether it has complied with the requirement under Section 856(c)(2) of the Internal Revenue Code that at least 95% of its gross income, on an annual basis, is derived from dividends, interest, rents from real property, gain from the sale of stock, securities and real property, and certain other types of income (“95% Requirement”). However, the Company will be treated as receiving the payments under the Monthly Payments Right.

     The Company intends to treat the Monthly Payments Right as additional sales proceeds under the Repurchase Transaction with a portion of the amounts to be received treated as imputed interest. The Company intends to treat only the portion of the payments treated as imputed interest as gross income for purposes of the 95% Requirement. However, counsel has advised that it is uncertain whether the Monthly Payments Right should be treated as additional sales proceeds or whether any portion of the payments received under the Monthly Payments Right is qualifying income for the purposes of determining whether the Company has complied with the 95% Requirement and that the Company’s positions may not be upheld if challenged by the IRS. If the payments under the Monthly Payments Right are treated as income that is not qualifying income for the purposes of determining whether the Company has complied with the 95% Requirement, then it is likely that the Company will not be able to satisfy the 95% Requirement for our taxable year ended December 31, 2007.

     The Company has not sought a ruling from the Internal Revenue Service with respect to the characterization of the Repurchase Transaction as a sale of securities for federal income tax purposes, the qualification of the Repurchase Right as a qualifying asset for purposes of the 75% Requirement, nor the qualification of the payments under the Monthly Payments Right as either additional sales proceeds or qualifying income under the 95% Requirement.

     If the Company fails to satisfy either the 75% Requirement or the 95% Requirement, then it will not qualify as a REIT for the taxable year ended December 31, 2007 unless it is eligible for relief under one or more provisions of the Internal Revenue Code and pays a penalty tax. If the Company did not qualify as a REIT for 2007, there would be significant adverse consequences to it and its shareholders, including:

• the Company would not be allowed a deduction for distributions to its shareholders in computing taxable income and would be subject to U.S. federal income tax at regular corporate rates (currently the Company estimates that that it would have no taxable income for 2007; however, it would be subject to tax in subsequent years when it has taxable income);

• the Company could be subject to the U.S. federal alternative minimum tax, if any, and possibly increased state and local taxes; and

• unless statutory relief provisions apply, the Company could not elect to be taxed as a REIT until 2012.

In addition, if the Company is not a REIT for 2007 and subsequent years, it will not be required to make distributions to its shareholders, and all distributions to shareholders for 2007 and subsequent years will be subject to tax as regular corporate dividends to the extent of current and accumulated earnings and profits.

11. Liability to Subsidiary Trusts Issuing Preferred Securities

     Hanover has issued trust preferred securities of trusts for which it owns all of the outstanding common stock. In exchange for the proceeds of the sale of trust securities, Hanover issued junior subordinated debt to the trusts. The junior subordinated debt represents all of the trusts’ assets and the terms of the junior subordinated debt are substantially the same as the terms of the trust securities. The interest rate of the trust securities is fixed during the first five years.

     The following is a summary of trust preferred securities outstanding as of September 30, 2007:

	HST-I			HST-II
Trust preferred securities outstanding	$20 million			$20 million
Interest rate as of September 30, 2007		8.51	%		9.209	%
Redemption period, at Hanover’s option	After March 30, 2010			After July 30, 2010
Maturity date	March 30, 2035			July 30, 2035
Date issued	March 2005			November 2005

17

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

12. Supplemental Disclosures for Statements of Cash Flows (dollars in thousands)

	Nine Months
	Ended September 30,
	2007		2006
Supplemental disclosures of cash flow information
Cash paid during the period for:
Income taxes	$	—	$	29
Interest (1)	$	11,793	$	9,885
Common stock issuance of 600,000 shares recorded as debt discount	$	1,218	$	—
Estimated principal reductions on Subordinate MBS recorded as liability and debt discount	$	2,980	$	—
Principal reductions on Subordinate MBS applied to liability recorded in connection with debt discount	$	167	$	—

(1) Amounts do not include cash payments for debt issuance costs

13. Repurchase of Equity Securities

     In March 2006, the Company’s Board of Directors authorized the repurchase of up to 2 million shares of the Company’s common stock. There is no expiration date for the Company’s repurchase program. The timing and amount of any shares repurchased will be determined by the Company’s management based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time. As a Maryland corporation, the Company cannot maintain treasury shares and as a result all acquired shares have been retired. For the nine months ended September 30, 2007, the Company repurchased 194,100 shares at an average price of $4.94 per share.

14. Stock Based Compensation

     As part of the sale of the due diligence division, the vesting requirements for common stock previously issued to two employees who were separated from the Company were eliminated. The Company recorded approximately $43,000 of compensation expense for the three months ended March 31, 2007 to reflect this change in vesting requirement.

     On March 15, 2007, the Company issued 29,000 shares of common stock to certain employees of the Company. The shares were issued pursuant to the 1997 Executive and Non-Employee Director Stock Option Plan (the “1997 Stock Plan”) and vest over a five-year period. The grants have a total award value of approximately $123,000, which will be amortized to personnel expense on a straight-line basis over the vesting period.

     In May 2007, the Company granted an option to purchase 2,000 shares of its common stock to one of the Company’s independent directors, upon his re-election to the Board of Directors and in accordance with the terms of the Company’s 1997 Stock Plan. This option is immediately exercisable and has a term of ten years. The exercise price of the option equals the closing price of the Company’s stock on the date of the grant. In the period the option was granted, the Company recorded compensation cost of approximately $1,000, which represents the fair market value of the option as estimated using the Black-Scholes option pricing model.

15. Issuance of Common Stock

     In August 2007, the Company issued 600,000 shares of the Company’s common stock to Ramius pursuant to a Stock Purchase Agreement between the Company and RCG PB, Ltd. dated as of August 10, 2007 in consideration for entering into and performing its obligations under the Repurchase Transaction dated as of August 10, 2007. The total market value of the Company’s common stock on the date of the Stock Purchase Agreement of approximately $1,218,000 has been recorded as debt discount and is being amortized to interest expense over the term of the Repurchase Transaction.

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16. Commitments and Contingencies

     On August 28, 2006, the Company entered into a warehouse agreement for up to a $125 million warehousing facility, which is established and financed by a third party. The warehousing facility will allow the Company to acquire a diversified portfolio of mezzanine level, investment grade, asset-backed securities, and certain other investments and assets in anticipation of the possible formation and issuance of a collateralized debt obligation. As of September 30, 2007, the Company has sold five investment grade securities into the warehousing facility with total sales proceeds of $5.7 million. If the Company does not form and issue a collateralized debt obligation, the warehouse agreement will expire and the Company will be liable for any losses incurred by the counterparty in connection with closing the warehousing facility and selling these securities. Due to the turmoil in the mortgage industry in the first nine months of 2007 and the lack of excess available funds, management of the Company has determined it is doubtful the Company can successfully issue the collateralized debt obligation in the short-term. As a result, the Company has recorded an expense of $483,000 for the nine months ended September 30, 2007 for the estimated cost of closing this facility. If the collateralized debt obligation is completed, the securities will be transferred into the collateralized debt obligation at the sales proceeds amount. The term of the warehouse agreement as of September 30, 2007, is day-to-day or closing and issuance of the collateralized debt obligation.

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

     The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2006. Historical results and trends which might appear should not be taken as indicative of future operations. Our results of operations and financial condition, as reflected in the accompanying statements and related footnotes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions, and other factors.

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 Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, as updated and supplemented by our disclosures in Item 1A to our Quarterly Reports on Form 10-Q filed during 2007, including this Quarterly Report on Form 10-Q for the period ending September 30, 2007, 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.

Executive Overview

     We are a real estate investment trust (“REIT”) formed to operate as a specialty finance company. Our primary business objective is to generate net interest income on our portfolio of prime mortgage loans and mortgage securities backed by prime mortgage loans. To a much lesser extent, technology related income is earned through HanoverTrade (“HT”), a division of our subsidiary, Hanover Capital Partners 2, Ltd. (“HCP-2”).

     We generate net interest income primarily by leveraging credit risk in subordinate mortgage-backed securities, or “Subordinate MBS”, through investments in the non-investment grade classes of these securities, which are collateralized by pools of prime single-family mortgage loans.  We believe we can effectively manage this credit risk and, as a result, we can achieve higher rates of return.  The higher rates of return are earned through the effect of a significant purchase discount, as we generally purchase these securities significantly below their par value, because of the presumed risks associated with these classes of securities.

     Effective January 12, 2007, our due diligence business, Hanover Capital Partners (“HCP”), was sold to Terwin Acquisition I, LLC (now known as Edison Mortgage Decisioning Solutions, LLC). As a result, the net assets and liabilities and results of operations of HCP have been presented as discontinued operations in the accompanying financial information and financial statements in this Form 10-Q.

     For the three months ended September 30, 2007, we experienced a net loss of $31.7 million compared to net income of $0.1 million for the same period of 2006. This decrease is primarily due to impairment expense of $30.2 million for other than temporary declines in fair value of our Subordinate MBS portfolio and a $1.5 million decrease in net interest income on our Subordinate MBS portfolio. The decrease in net interest income is a result of the increased financing costs associated with a new fixed-term financing facility we established in August 2007.

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     For the nine months ended September 30, 2007, we experienced a net loss of $42.3 million compared to the net income of $0.2 million for the same period of 2006. This decrease is primarily due to impairment expense of $42.0 million for other than temporary declines in fair value of our Subordinate MBS portfolio, a $0.6 million decrease in net interest income on our Subordinate MBS portfolio, and a $0.5 million legal settlement, partially offset by a gain on sale of $1.3 million of our HCP business. The decrease in net interest income is a result of the increased financing costs associated with a new fixed-term financing facility we established in August 2007. The gain on the sale of our HCP business is included in income from discontinued operations.

Description of Business

     Core business

     Our principal business is to generate net interest income by investing in Subordinate MBS, collateralized by pools of prime single-family mortgage loans, and purchasing prime whole single-family mortgage loans for investment, securitization and resale. Our primary strategy is to purchase the junior tranches of prime residential mortgage securitizations, which are exposed to the first credit losses of the underlying loan pool (“non-investment grade” or “first loss” tranches), and generally represent under 1% of the total principal balance of all loans in the pool. These investments are purchased at a discount to par value. The collateral underlying the securitizations in which we invest is comprised of prime, jumbo single-family mortgage loans that are usually conforming, except for loan size.

     The following exhibit provides an illustration of a typical securitization structure, with hypothetical amounts and identification of our primary investment focus:

Note: These prices are representative of historical market activity prior to July of 2007. There has been considerable turmoil in the real estate securities markets during the quarter ended September 30, 2007. As of September 30, 2007, there have been no observable market transactions that support the historical amounts shown. As a result, future market transactions may be different. In any event, we believe the model is still valid in many strategies related to Subordinate MBS investing.

     We attempt to increase the earnings potential in our investments by leveraging our purchases of mortgage securities with borrowings obtained primarily through the use of sales with agreements to repurchase the securities (“Repurchase Agreements”). Historically, the borrowings under these Repurchase Agreements were on a 30 day revolving basis and were generally at 50 to 97 percent of the security’s fair market value, depending on the security, and were adjusted to market value each month as the Repurchase Agreements were re-established. On August 10, 2007, we entered into a new Repurchase Agreement and repaid substantially all of our then outstanding Repurchase Agreements. This new Repurchase Agreement has a term of one year, is not adjusted to market value, and has a higher effective interest rate than our previous borrowings.

     Other mortgage security or mortgage loan financing is accomplished through the use of committed lines of credit, usually under Repurchase Agreements or through the creation of collateralized mortgage obligations, “CMOs”.

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     We also maintain a portfolio of whole-pool Fannie Mae and Freddie Mac mortgage-backed securities, “Agency MBS”, primarily to satisfy certain exemptive provisions of the Investment Company Act of 1940 (the “40 Act”). We do not take deposits or raise money in any way that would subject us to consumer lending or banking regulations and we do not deal directly with consumers. On occasion, we receive income from real estate investment management services that can include asset management and administrative services.

     Non-Core Business

     In line with our strategy to focus on our portfolio operations, we reduced the technology and loan sale advisory (“LSA”) operations that were conducted through HT in 2006, and completed the sale of our due diligence operations in 2007.

     HT currently earns revenues from two existing customer contracts through its technology operations. Previously, HT marketed its web-based proprietary software applications to meet specific needs of the mortgage industry in the secure transmission, analysis, valuation, tracking and stratification of loan portfolios. It earned licensing and related servicing fees from its proprietary software applications to government agencies and financial institutions involved in trading and/or originating residential mortgage loans. Through its Servicing Source division, which was sold in December 2006, HT also licensed and used applications to provide financial management of mortgage servicing rights including mark to market valuation, impairment testing, and credit and prepayment analysis to clients. HT no longer actively markets its technology to new clients.

     The LSA operation provided brokerage, asset valuation and consulting services. The brokerage service integrated varying degrees of traditional voice brokerage conducted primarily by telephone, web-enhanced brokerage and online auction hosting. The LSA operation also performed market price valuations for a variety of loan portfolios and offered consulting advice on marketing strategies for those portfolios. The LSA operation was suspended in May 2006.

     HCP, which was sold effective January 12, 2007, provided services to commercial banks, mortgage banks, government agencies, credit unions and insurance companies. The services provided included: 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. The delivery of the HCP consulting and outsourcing services usually required an analysis of a block or pool of loans on a loan-by-loan basis. This required the use of technology developed and owned by HCP and operated by employees highly specialized and trained by HCP.

Current Market Conditions and Material Events

     As a result of the increase in the credit spreads and interest rates and the overall uncertainties in the mortgage industry during the first nine months of 2007, the estimated market values for our Subordinate MBS have severely decreased.

     Although we do not invest in subprime mortgages or mortgage-backed securities collateralized by subprime mortgages, we have been negatively impacted by the general decline in the market value of all residential mortgage assets due to the significant losses in the subprime sector of the residential mortgage industry that began to occur in the first half of 2007 and has progressively worsened. The losses seem to be due to underwriting deficiencies, increases in interest rates on adjustable rate mortgages, and declining housing prices. These losses and the corresponding fervor of information reported through the media have caused the credit spreads (yield for credit risk) to increase for the industry as a whole and have caused overall investor demand for mortgage-backed securities to decrease.

     Although we have experienced no significant decline in the performance of our Subordinate MBS portfolio, the lower estimated fair values of our portfolio and the recent turmoil in the mortgage markets related to quality issues of loans in the subprime mortgage and mortgage securities markets negatively impacted the amounts at which we were able to borrow to finance our portfolio of securities collateralized by prime mortgages. This spill-over effect caused a reduction in the amount we were able to borrow to finance our portfolio. As lenders used the declining market prices to value the securities financed, we were required to reduce with cash the amounts we borrowed. In some cases, lenders called for deposits of cash (“margin calls”) after an evaluation of recent fair value changes and before the maturity date of our Repurchase Agreement with them, which was usually 30 days from the origination or last roll.

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     Through August 9, 2007, our lenders regularly required us to repay a portion of amounts borrowed under our Repurchase Agreements. Although no lender terminated its Repurchase Agreement with us during the period prior to August 9, 2007, these repayments were a significant drain on our available cash. The increasing frequency and amount of required repayments in the period immediately prior to August 9, 2007 posed a threat to our ability to maintain our portfolio of Subordinate MBS. In response to these deteriorating market conditions, on August 10, 2007, we entered into a one-year fixed-rate financing facility for the full amount of the then outstanding Repurchase Agreement balances of approximately $81 million and we repaid substantially all of our then outstanding Repurchase Agreements (see Liquidity and Capital Resources elsewhere in this Form 10-Q).

     For the nine months ended September 30, 2007, we incurred approximately $635,000 of actual losses on the underlying mortgage loans in our Subordinate MBS portfolio. We have seen increases in the level of losses for the nine months ended September 30, 2007, compared to our historical experience. Our Subordinate MBS are purchased at a discount to par value, and a portion of this discount is an implied reserve for losses on the underlying mortgage loans. To the extent the timing and amount of actual losses approximate or are less than the implied losses in the purchase discount, there will not be a reduction in estimated cash flows or yield, and the long-term economic value of the bonds will not be impaired.

     As described above, the decline in the estimated fair value of our portfolio has been significantly impacted by industry factors not directly attributable to the prime mortgage backed securities in which we invest. Although we believe that the markets will eventually stabilize and return to ratios we have traditionally experienced, the turmoil in the industry appears to be much greater than the normal cyclical swings. We are unable to predict when a recovery will occur and the level of the recovery. In addition, we may not have sufficient funds to retire or refinance the outstanding principal under the Repurchase Transaction upon termination of that financing on August 9, 2008 and may be required to sell securities to settle the outstanding principal, which could be before a full recovery of the market has occurred. As a result, we determined the decline in the fair value of our Subordinate MBS portfolio was other than temporary and recorded impairment expense of $30.2 million and $42.0 million for the three and nine months ended September 30, 2007. These amounts represent the differences between the adjusted cost basis and the estimated fair value at the date of the adjustments, determined on a security by security basis.

     As described above, we entered into a one-year master repurchase agreement on August 10, 2007 (the “Repurchase Transaction”). Our current operations under the Repurchase Transaction are not cash flow positive. At the termination of the agreement on August 9, 2008, we are required to repay the outstanding principal through cash or in-kind securities. We are seeking additional capital and are in discussions with potential investors, but no commitments or agreements have been reached. Additional sources of capital are required for us to generate positive cash flow and continue operations in the long-term, including retiring the Repurchase Transaction.

     On August 15, 2007, we sold our entire portfolio of Agency MBS. The sales were necessary in order to generate some liquidity and close existing borrowing positions with lenders that was a condition of the establishment of the new repurchase agreement. On August 29, 2007, we financed the acquisition of approximately $30 million of Agency MBS with 30-day revolving Repurchase Agreements. As a result, we maintained compliance with the 40 Act during the quarter ended September 30, 2007.

Critical Accounting Estimates

     The significant accounting policies used in preparation of our Consolidated Financial Statements are described in Note 2 to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2006. Certain critical accounting policies are complex and involve significant judgment by our management, including the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. As a result, changes in these estimates and assumptions could significantly affect our financial position or our results of operations. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

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     Amortization of Purchase Discounts on Mortgage Securities

     Purchase discounts on mortgage securities are recognized in earnings as adjustments to interest income (accretable yield) using the effective yield method over the estimated lives of the related securities as prescribed under the Emerging Issues Task Force of the Financial Accounting Standards Board No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. Estimates and judgments related to future levels of mortgage prepayments, mortgage default assumption rates and timing and amount of credit losses are critical to this determination. Mortgage prepayment expectations, default rate assumptions, and timing and amount of credit losses can vary considerably from period to period based on current and projected changes in interest rates and other factors such as portfolio composition. We estimate mortgage prepayments, defaults and credit losses based on past experiences with specific investments within the portfolio and current market expectations for changes in the interest rate environment. Our estimates could vary widely from that ultimately experienced and, such variances could be material.

     Valuation of Mortgage Securities

     Historically, we have determined the estimated fair value of our Subordinate MBS portfolio using an enhanced proprietary valuation model we developed. Our Subordinate MBS are not readily marketable with quoted market prices. We previously conducted comparisons of recent Subordinate MBS sales and the attributes of these sales to the estimates and attributes determined by the model and have determined the model is an accurate indicator of fair value.

     However, as a consequence of limited trading and a distressed market for the securities in our portfolio during the third quarter of 2007 and through the date of this report, the fair market values underpinning our market valuation adjustments are based on facts that are far less certain than has historically been the case. Although we believe the inherent assumptions underlying the model are still relevant in the current market, there are no trades in the market place to utilize as a reference or comparison and therefore, the securities are not subject to valuation based on observable market transactions. As a result of this uncertainty and the distressed nature of the market, we modified the process for determining the estimated market value of our Subordinate MBS to use only inputs from third parties.

     We obtained estimated values or marks prepared by a third party pricing service and from various dealers as an indicator in the current market. For both of these sources, the estimations of values are based on a variety of assumptions (including probable modeling and, as to the pricing service, marks and inputs from various sources) they do not share and could prove to be inaccurate.

     We determined the estimated market value of our securities using the marks from the third party pricing service and where a mark from the service was not available, marks from the dealers were used.

     We believe the estimated market values determined through the above process reasonably reflect the values we may have been able to receive as of September 30, 2007, should we have chosen to sell them. These estimates involve uncertainty and approximations and, as a result, amounts realized in actual sales could differ significantly from the fair values determined.

     The table below is a summary of the source of the prices used.

Source of Marks	Percent of Total
Dealers	4%
Pricing Service	96%
	100%

     Real Estate Owned

     We record our Real Estate Owned, or “REO”, at the lower of cost or estimated fair value, less anticipated costs to sell. The estimated fair value is determined through real estate appraisals, broker pricing and home inspections, which are updated on a periodic basis. For the nine months ended September 30, 2007, we have recorded approximately $174,000 of impairment expense related to REO based upon these estimated fair values.

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     Same Party Transactions

     The accounting profession has recently raised an issue concerning the current industry practice for recording a purchase of mortgage-backed securities from a counterparty with a subsequent financing of the security through a repurchase agreement with the same counterparty “Same Party Transactions”. The financing of our Agency MBS portfolio was transacted through Same Party Transactions and recorded following current industry practice and accepted accounting guidelines. We recorded the purchase of these securities as an asset, and recorded the subsequent financing as a liability on our consolidated balance sheet. In addition, the corresponding interest income earned on these securities and interest expense incurred on the related repurchase agreements are reported gross on our consolidated statements of operations.

     The issue surrounds a technical interpretation of the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, which states that Same Party Transactions may not qualify as a purchase by us because the mortgage-backed securities we purchased in Same Party Transactions may not be determined to be legally isolated from the counterparty in such transactions. If the isolation requirement is not met, we would be required to record the transaction on a net basis, recording only an asset equal to the amount of the security, net of the related financing. In addition, we would also record the corresponding interest income and interest expense on a net basis. As the transaction would not qualify as a purchase, the resulting asset would be considered, and classified as, a freestanding derivative, with the corresponding change in the fair value of such derivative in the income statement. The value of the derivative created by this type of transaction would reflect the value of the underlying security and the value of the underlying financing provided by the counterparty.

     In July 2007, the FASB issued for comment a proposed standard that provides guidance on the accounting treatment for Same Party Transactions. We are in the process of reviewing this proposed standard and are uncertain if changes will be made before the final guidance is issued. As such, we are unable to provide an assessment of the impact on our financial position, results of operations or cash flows. As of September 30, 2007, all of our Agency MBS are financed through Same Party Transactions and none of our Subordinate MBS are financed through Same Party Transactions.

     Financial Condition

     The most significant changes in our balance sheet as of September 30, 2007, compared to December 31, 2006, are reflected in the net decrease of our investment portfolio and changes in related accounts including the decrease in our cash balances. The tables below present the primary assets of our investment portfolio, net of related financing, as of September 30, 2007 and December 31, 2006 (dollars in thousands):

	Principal		Carrying
September 30, 2007	Balance		Value		Financing		Net Equity
Mortgage Loans:
Collateral for CMOs	$	6,899	$	6,596	$	5,008	$	1,588
Subordinate MBS:
Available for sale		227,934		113,462		77,874		35,588
Agency MBS:
Trading		30,045		30,136		28,743		1,393
Held to maturity		—		—		—		—
		30,045		30,136		28,743		1,393
Total	$	264,878	$	150,194	$	111,625	$	38,569

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	Principal		Carrying
December 31, 2006	Balance		Value		Financing		Net Equity
Mortgage Loans:
Collateral for CMOs	$	10,149	$	9,736	$	8,082	$	1,654
Subordinate MBS:
Available for sale		230,751		154,599		89,959		64,640
Agency MBS:
Trading		106,479		105,104		102,590		2,514
Held to maturity		5,845		6,254		—		6,254
		112,324		111,358		102,590		8,768
Total	$	353,224	$	275,693	$	200,631	$	75,062

     Although we have a facility for $200 million of financing for mortgage loans, our tangible net worth, as defined in the related agreement, is below the contractual amount required to obtain financing. Although our lender has not yet notified us that it intends to exercise any remedies due to our failure to maintain the required tangible net worth, such failure is a Static Pool Event under the agreement and essentially prohibits drawing funds under the agreement without a waiver or cure of the covenant. Should this situation change, we may invest in this portfolio type. As this portfolio type meets certain compliance needs related to exemption under the 40 Act, investment in this portfolio type will allow us to reduce or replace our investments in the Agency MBS portfolio.

     Our Subordinate MBS portfolio has decreased slightly in principal balance by $2.8 million and our carry value has decreased by $41.1 million. The principal balance decreased due to principal payments on the securities and the carrying value decreased due to increases in credit spreads that reduced the fair value of these securities during the nine months ended September 30, 2007. Our net equity in this portfolio decreased by $29.1 million primarily due to the decrease in the carrying values.

     The Agency MBS classified as trading are held primarily to meet certain compliance needs related to exemption under the 40 Act. On August 15, 2007, we sold our entire portfolio of Agency MBS. The sales were necessary in order to generate some liquidity and close existing borrowing positions with lenders that was a condition of the consummation of new fixed term financing. On August 29, 2007, we financed the acquisition of approximately $30 million of Agency MBS, with a 30-day revolving Repurchase Agreement. As a result, we maintained compliance with the 40 Act during the quarter ended September 30, 2007.

     Our book value per common share as of September 30, 2007 was $1.39 compared to $6.99 as of December 31, 2006. The decrease in book value is primarily attributable to our net loss of $42.3 million and our other comprehensive loss of $2.4 million for the nine months ended September 30, 2007, our dividend for the first quarter of 2007 of $1.2 million and the issuance of 600,000 shares of common stock in August 2007 in connection with the Repurchase Transaction.

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Results of Operations

Revenues by Portfolio Type
(dollars in thousands)

	Three Months Ended									Nine Months Ended
	September 30,						Favorable			September 30,						Favorable
	2007			2006			(Unfavorable)			2007			2006			(Unfavorable)
Mortgage Loans including CMO Collateral
Interest income	$	110		$	203		$	(93	)	$	402		$	857		$	(455	)
Interest expense		(79	)		(173	)		94			(310	)		(574	)		264
Net interest income		31			30			1			92			283			(191	)
Mark to market		—			—			—			—			(18	)		18
Gains (losses) on sales		—			—			—			—			94			(94	)
Other		14			—			14			86			—			86
Loan loss reserve		—			—			—			—			—			—
Total		45			30			15			178			359			(181	)
Subordinate MBS
Interest income		5,116			4,503			613			14,368			12,354			2,014
Interest expense		(3,575	)		(1,485	)		(2,090	)		(6,475	)		(3,893	)		(2,582	)
Net interest income		1,541			3,018			(1,477	)		7,893			8,461			(568	)
Gains (losses) on sale		—			209			(209	)		194			849			(655	)
Mark to market		(30,249	)		(131	)		(30,118	)		(42,243	)		(292	)		(41,951	)
Total		(28,708	)		3,096			(31,804	)		(34,156	)		9,018			(43,174	)
Agency MBS
Interest income		749			1,660			(911	)		3,811			3,396			415
Interest expense		(679	)		(1,451	)		772			(3,328	)		(2,797	)		(531	)
Net interest income		70			209			(139	)		483			599			(116	)
Gains (losses) on sale		(997	)		—			(997	)		(997	)		(109	)		(888	)
Mark to market		1,548			2,785			(1,237	)		(902	)		1,445			(2,347	)
Freestanding derivatives		(625	)		(3,062	)		2,437			1,691			(1,760	)		3,451
Total		(4	)		(68	)		64			275			175			100
Other
Interest income		219			307			(88	)		733			1,025			(292	)
Interest expense		(913	)		(914	)		1			(2,740	)		(2,740	)		—
Net interest income		(694	)		(607	)		(87	)		(2,007	)		(1,715	)		(292	)
Mark to market		—			(129	)		129			(180	)		(929	)		749
Freestanding derivatives		(8	)		(116	)		108			(23	)		(97	)		74
Technology and loan brokering and advisory services		230			538			(308	)		1,103			2,543			(1,440	)
Other		(287	)		49			(336	)		(467	)		(39	)		(428	)
Total		(759	)		(265	)		(494	)		(1,574	)		(237	)		(1,337	)
Total	$	(29,426	)	$	2,793		$	(32,219	)	$	(35,277	)	$	9,315		$	(44,592	)

     Total income from our Mortgage Loan portfolio for the nine months ended September 30, 2007, decreased compared to the same period of 2006 primarily due to a decrease in the level of collateral for CMOs and related financing in 2007 and the sale of all mortgage loans classified as held for sale during April of 2006.

     For our Subordinate MBS portfolio, the mark to market loss increased by $30.1 million and $42.0 million for both the three and nine months ended September 30, 2007, respectively, compared to the same periods of 2006. The increase in market loss, we determined, is due to other than temporary declines in fair value as of September 30, 2007 and we recorded impairment expense of $11.8 million and $30.2 million for the three months ended June 30, 2007 and September 30, 2007, respectively. Similar declines in fair value were not experienced during 2006. For this same portfolio and related periods, net interest income decreased for the three and nine months ended September 30, 2007, compared to the same period of 2006 due to an increase in the interest expense associated with the new fixed-term financing facility we established in August 2007. This decrease is partially offset by the increase in the size of this portfolio for 2007 compared to 2006 and, to a much lesser extent, increases in the interest rate for adjustable rate securities. During the beginning of 2006, we were still investing the proceeds from our $20 million trust preferred securities offering in November 2005 and were not fully invested until the end of March 2006. We had gains on sales of securities of $0.2 million for the nine months ended September 30, 2007, compared to sales of $0.8 million for the same period of 2006. We sold 18 securities during the first two quarters of 2007, respectively, as part of a minor portfolio reorganization and anticipation of potential credit issues.

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     Generally, our Agency MBS classified as trading are financed via Repurchase Agreements and are hedged through forward sales of similar securities. The net revenue generated from this portfolio is heavily dependent upon changes in the short-term and long-term interest rates and the spread between these two rates. The net change in the performance of this portfolio is due primarily to the timing of differences arising from the changes in the interest rates and minor differences between the principal amount of the securities and the notional amount of the hedging activity. On August 15, 2007, we sold our entire portfolio of Agency MBS. The sales were necessary in order to generate some liquidity and close existing borrowing positions with lenders that was a condition of the consummation of the new fixed term financing under the Repurchase Transaction. Although we purchased approximately $30 million of Agency MBS on August 29, 2007, the size of our Agency MBS portfolio as of September 30, 2007 was significantly smaller than during 2006 and the beginning of 2007. In addition, the net revenue has been positively impacted by the interest income generated from Agency MBS classified as held to maturity, which were not hedged through forward sales and were not financed for the majority of the first nine months of 2007 and 2006.

     Other interest income includes interest earned from the other subordinate security and cash and cash equivalents.

     Other mark to market for the three and nine months ended September 30, 2007 and 2006 represents a write-down of REO that was acquired in 2005 and is included in other assets. The local economy for a portion of these properties had a significant downturn, which depressed the value of these properties. At September 30, 2007, we have one remaining property to be sold with a total carrying value of approximately $28,000.

     Technology and loan brokering and advisory services have decreased due to the suspension of the loan sale advisory operations in May of 2006. In addition, in 2006 and early 2007, several customers did not renew the technology solutions and services they received from us.

     Other freestanding derivatives represent the mark to market of our interest rate caps used to hedge the financing costs of our portfolio. The expense from the change in the market value of these derivatives increased for the three and nine months ended September 30, 2007, compared to the same periods in 2006. These changes in market value are due to the passage of time and one-month LIBOR remaining substantially at or below the strike rate of the interest rate caps.

     Operating Expenses

The following table details operating expenses for the Company on a consolidated basis (dollars in thousands):

	Three Months Ended September 30,							Nine Months Ended September 30,
					Increase							Increase
	2007		2006		(Decrease)			2007		2006		(Decrease)
Personnel	$	869	$	1,007	$	(138	)	$	2,998	$	3,256	$	(258	)
Legal and professional		410		668		(258	)		1,368		2,197		(829	)
General and administrative		256		247		9			1,276		869		407
Depreciation and amortization		154		178		(24	)		461		528		(67	)
Occupancy		80		92		(12	)		233		234		(1	)
Technology		104		212		(108	)		413		947		(534	)
Financing		256		120		136			558		324		234
Other		195		160		35			493		521		(28	)
Total expenses	$	2,324	$	2,684	$	(360	)	$	7,800	$	8,876	$	(1,076	)

     Operating expenses for the three and nine months ended September 30, 2007, decreased from the same periods in 2006. The major changes within operating expenses were in personnel, legal and professional, general and administrative, technology and financing.

• Personnel costs have decreased due to overall reductions in headcount during the latter part of 2006 and throughout 2007.

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• Legal and professional fees decreased due to higher legal fees incurred in 2006 in connection with a claim against the Company and higher fees in 2006 for consulting services in connection with compliance with Sarbanes Oxley requirements. In addition, the decrease for the nine month period was also impacted by additional audit fees incurred in 2006 in connection with the audit of our 2005 financial statements. Such additional fees were not incurred in 2007 in connection with the audit of our 2006 financial statements.

• General and administrative expenses increased for the nine month period in connection with litigation settlement costs that were charged to expense in the first quarter of 2007.

• Technology costs decreased due to the overall decrease in technology revenue and related activities.

• Financing costs increased due to increases in the non-use fee for our $200 million committed line of credit as the initial ramp-up period during the latter half of 2006 and the beginning of 2007 expired and we have not utilized the facility.

     Discontinued Operations

     Income (loss) from discontinued operations includes the results of operations of the HCP business that was sold in January 2007. The income from discontinued operations for the nine months ended September 30, 2007 includes a gain on sale of $1.3 million.

     Additional Analysis of REIT Investment Portfolio

          Investment Portfolio Assets and Related Liabilities

     The following tables reflect the average balances for each major category of our investment portfolio as well as associated liabilities with the corresponding effective yields and rates of interest (dollars in thousands):

	Three Months Ended September 30,
	2007					2006
	Average		Effective			Average		Effective
	Balance		Rate			Balance		Rate
Investment portfolio assets:
Mortgage Loans
Held for sale	$	—		0.00	%	$	—		0.00	%
Collateral for CMO		6,902		6.37	%		11,749		6.91	%
Agency MBS		50,826		5.89	%		114,202		5.81	%
Subordinate MBS		142,660		14.34	%		152,004		11.85	%
		200,388		11.93	%		277,955		9.16	%
Investment portfolio liabilities:
CMO borrowing		4,456		6.01	%		9,009		7.10	%
Repurchase Agreements on:
Mortgage Loans held for sale		—		0.00	%		—		—
Collateral for CMO		646		7.43	%		731		7.11	%
Agency MBS		49,018		5.54	%		106,265		5.46	%
Subordinate MBS		82,976		17.23	%		89,260		6.65	%
		137,096		12.64	%		205,265		6.06	%
Net investment portfolio assets	$	63,292				$	72,690
Net interest spread				(0.71)	%				3.10	%
Yield on net portfolio assets (1)(2)				10.38	%				17.92	%
Ratio of portfolio liabilities to net investment				216.61	%				282.38	%

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	Nine Months Ended September 30,
	2007					2006
	Average		Effective			Average		Effective
	Balance		Rate			Balance		Rate
Investment portfolio assets:
Mortgage Loans
Held for sale	$	—		0.00	%	$	3,822		7.85	%
Collateral for CMO		8,231		6.51	%		12,749		6.61	%
Agency MBS		88,330		5.75	%		81,457		5.56	%
Subordinate MBS		146,879		13.04	%		132,230		12.46	%
		243,440		10.18	%		230,258		9.62	%
Investment portfolio liabilities:
CMO borrowing		5,720		6.39	%		9,937		6.48	%
Repurchase Agreements on:
Mortgage Loans held for sale		—		0.00	%		1,061		6.66	%
Collateral for CMO		665		7.22	%		745		6.80	%
Agency MBS		82,333		5.39	%		72,893		5.12	%
Subordinate MBS		87,334		9.89	%		82,432		6.30	%
		176,052		7.66	%		167,068		5.80	%
Net investment portfolio assets	$	67,388				$	63,190
Net interest spread				2.52	%				3.82	%
Yield on net portfolio assets (1)(2)				16.75	%				19.71	%
Ratio of portfolio liabilities to net investment				261.25	%				264.39	%

(1)	Yield on net portfolio assets is computed by dividing the applicable net interest income by the average daily balance of net portfolio assets.
(2)	The yields on net portfolio assets do not include the hedging cost on the Agency MBS portfolio.

     The yield on net portfolio assets decreased for the three and nine months ended September 30, 2007, from the same periods in 2006. This decrease in yield is the result of an increase in the one-month LIBOR, which is the basis for substantially all of our financing, prior to August 10, 2007 and the higher borrowing costs associated with the Ramius Repurchase Transaction after August 10, 2007.

     Average net investment portfolio assets decreased for the three months ended September 30, 2007 from the same period in 2006 due to the significant reductions in estimated market value of our Subordinate MBS portfolio recorded during the three months ended June 30, 2007 and September 30, 2007 and the significant reduction in the size of our Agency portfolio in August of 2007.

     Average net investment portfolio assets increased for the nine months ended September 30, 2007, from the same period in 2006 primarily due to the investment of $20 million of proceeds from the issuance of trust preferred securities in November 2005. This increase is partially offset by the significant reductions in estimated market value of our Subordinate MBS portfolio recorded during the three months ended June 30, 2007 and September 30, 2007, and the significant reduction in the size or our Agency MBS portfolio in August of 2007.

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          Mortgage Loans

     The following tables provide details of the net interest income generated on our Mortgage Loan portfolio (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Average asset balance	$	6,902		$	11,749		$	8,231		$	16,571
Average CMO borrowing balance		4,456			9,009			5,720			9,937
Average balance — Repurchase Agreements		646			731			665			1,806
Net investment		1,800			2,009			1,846			4,828
Average leverage ratio		73.92	%		82.90	%		77.57	%		70.86	%
Effective interest income rate		6.37	%		6.91	%		6.51	%		6.89	%
Effective interest expense rate — CMO borrowing		6.01	%		7.10	%		6.39	%		6.48	%
Effective interest expense rate — Repurchase Agreements		7.43	%		7.11	%		7.22	%		6.72	%
Net interest spread		0.18	%		(0.19	)%		0.04	%		0.37	%
Interest income	$	110		$	203		$	402		$	857
Interest expense — CMO borrowing		67			160			274			483
Interest expense — Repurchase Agreements		12			13			36			91
Net interest income	$	31		$	30		$	92		$	283
Yield		6.89	%		5.97	%		6.64	%		7.82	%

     Our Mortgage Loan portfolio net interest income and corresponding yield declined for the nine months ended September 30, 2007. In April of 2006, we sold all remaining mortgage loans that were classified as held for sale.

          Subordinate MBS

     The following tables provide details of the net interest income generated on our Subordinate MBS portfolio (dollars in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Average asset balance	$	142,660		$	152,004		$	146,879		$	132,230
Average balance — Repurchase Agreements		82,976			89,260			87,334			82,432
Net investment		59,684			62,744			59,545			49,798
Average leverage ratio		58.16	%		58.72	%		59.46	%		62.34	%
Effective interest income rate		14.34	%		11.85	%		13.04	%		12.46	%
Effective interest expense rate — Repurchase Agreements		17.23	%		6.65	%		9.89	%		6.30	%
Net interest spread		(2.89	)%		5.20	%		3.15	%		6.16	%
Interest income	$	5,116		$	4,503		$	14,368		$	12,354
Interest expense — Repurchase Agreements		3,575			1,485			6,475			3,893
Net interest income	$	1,541		$	3,018		$	7,893		$	8,461
Yield		10.33	%		19.24	%		17.67	%		22.65	%

     The Subordinate MBS portfolio’s net interest income decreased for the three and nine months ended September 30, 2007, from the same period in 2006, primarily due to the higher borrowing costs associated with the Ramius Repurchase Transaction after August 10, 2007. This decrease is partially offset by the increase in investment in this portfolio from the proceeds from our $20 million trust preferred securities offering in November of 2005.

     The Subordinate MBS portfolio’s net interest spread decreased for the three and nine months ended September 30, 2007, from the same period in 2006 due to an increase in the effective interest expense rate partially offset by an increase in the effective interest income rate. The increase in the effective interest expense rate is due to the higher borrowing costs associated with the Ramius Repurchase Transaction after August 10, 2007 and, to a lesser extent, increases in the average one-month LIBOR from the first nine months of 2006 to the first nine months of 2007. The increase in the interest income rate is due to a higher level of income accretion as the carrying value of the securities has been reduced for estimated market value adjustments.

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          Agency MBS

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Average asset balance	$	50,826		$	114,202		$	88,330		$	81,457
Average balance — Repurchase Agreements		49,018			106,265			82,333			72,893
Net investment		1,808			7,937			5,997			8,564
Average leverage ratio		96.44	%		93.05	%		93.21	%		89.49	%
Effective interest income rate		5.89	%		5.81	%		5.75	%		5.56	%
Effective interest expense rate — Repurchase Agreements		5.54	%		5.46	%		5.39	%		5.12	%
Net interest spread		0.35	%		0.35	%		0.36	%		0.44	%
Interest income	$	749		$	1,660		$	3,811		$	3,396
Interest expense — Repurchase Agreements		679			1,451			3,328			2,797
Net interest income	$	70		$	209		$	483		$	599
Yield		15.49	%		10.53	%		10.74	%		9.33	%

     The Agency MBS portfolio’s net interest income decreased for the three and nine months ended September 30, 2007, from the same period in 2006, primarily due to increased financing costs on the Agency MBS classified as held for sale, as these securities were financed for a longer period of time in 2007 than 2006. The Agency MBS portfolio’s net interest spread remained relatively constant for both periods.

     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 nine months ended September 30, 2007 (dollars in thousands):

Net interest income	$	483
Loss on mark to market of mortgage assets		(902	)
Loss on sale		(997	)
Other gain (forward sales)		1,691
Total	$	275

Dividends

     We operate as a REIT and are required to pay dividends equal to at least 90% of our REIT taxable income. We intend to pay quarterly dividends and other distributions to our stockholders of all or substantially all of our taxable income in each year to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code of 1986, as amended. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, both tax and GAAP, financial condition, maintenance of REIT status and such other factors as the Board of Directors deems relevant.

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Taxable Income

     Taxable income (loss) for the nine months ended September 30, 2007, is approximately $(362,000). Taxable income (loss) differs from net income (loss) because of timing differences (refers to the period in which elements of net income (loss) can be included in taxable income (loss)) and permanent differences (refers to an element of net income (loss) that must be included or excluded from taxable income (loss)).The following table reconciles net income (loss) to estimated taxable income (loss) for the nine months ended September 30, 2007 (dollars in thousands):

Net income (loss)	$	(42,272	)
Add (deduct) differences:
Mark to market of mortgage assets		42,516
Sale of mortgage securities		(107	)
Mark to market of freestanding derivatives		456
Net income in subsidiaries not consolidated for tax purposes — net		(1,311	)
Interest income and expense adjustments for sale of securities to Ramius		107
Other		249
Estimated taxable income (loss)	$	(362	)

     Excluded from the taxable income (loss) shown above is a loss on the sale of the securities to Ramius under the Repurchase Transaction of approximately $69,329,000. This taxable loss is deferred until either we exercise our right to repurchase the securities, in which case the loss becomes a component of the tax cost basis of the securities repurchased, or until the right to repurchase the securities expires, in which case the loss becomes realized and subject to capital loss limitations.

     As a REIT, we are required to pay dividends amounting to 85% of each year’s taxable ordinary income and 95% of the portion of each year’s capital gain net income that is not taxed at the REIT level, by the end of each calendar year and to have declared dividends amounting to 90% of our REIT taxable income for each year by the time we file our Federal tax return. Therefore, we generally pass through substantially all of our earnings to stockholders without paying Federal income tax at the corporate level.

     Under the Repurchase Transaction, we have agreed with Ramius that we intend to treat the Repurchase Transaction as a sale of securities for U.S. federal income tax purposes. We and Ramius agreed to file all tax returns consistent with such intent and not to take any contrary position unless required by applicable law. Under the Repurchase Transaction we have the right, on August 9, 2008, to repurchase the securities under the Repurchase Transaction for approximately $85 million assuming all other conditions have been satisfied (“the Repurchase Right”). In addition, we have the right to receive Monthly Additional Repurchase Price Payments equal to the excess of all interest payments received on the securities under the Repurchase Transaction in excess of $810,000 (the “Monthly Payments Right”).

     If the Repurchase Transaction is treated as a sale of securities for federal income tax purposes, we will not be treated as owning the securities for the purposes of determining whether we have complied with the requirement under Section 856(c)(4) of the Internal Revenue Code that at least 75 percent of the value of our total assets are represented by real estate assets, cash, cash equivalents and Government securities at the end of each calendar quarter (“75% Requirement”). However, the Repurchase Right and the Monthly Payments Right would be considered assets for purposes of determining whether we satisfy the 75% Requirement.

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     We intend to treat the Repurchase Right as a qualifying real estate asset for purposes of the 75% Requirement and to treat the Monthly Payments Right as a non-qualifying asset. Counsel has advised that it is uncertain whether the Repurchase Right constitutes a qualifying real estate asset for purposes of the 75% Requirement and that our position may not be upheld if challenged by the IRS. If the IRS were to deem that the Repurchase Right is not a qualifying asset for purposes of the 75% Requirement, and the value of the Repurchase Right together with our other non-qualifying assets exceeds 25% of our assets, then we would not have satisfied the 75% Requirement for the quarter ended September 30, 2007, or in any future quarter in which the value of the Repurchase Right together with our other non-qualifying assets exceeds 25% of our assets. We have obtained an independent valuation of the Repurchase Right under the Repurchase Transaction as of September 30, 2007. Based upon this valuation, we believe that we have satisfied the 75% Requirement for the quarter ended September 30, 2007 even if the Repurchase Right is a non-qualifying asset. However, this valuation may be subject to challenge by the IRS, and there can be no assurance that the valuation would be upheld in the event of such challenge. Further, the value of the Repurchase Right is expected to increase each quarter as the exercise date of the Repurchase Right approaches. As a result, if the Repurchase Right were to be treated as a non-qualifying asset for the 75% Requirement, we may not be able to satisfy the 75% Requirement in future quarters based on the increasing values.

     If the Repurchase Transaction is treated as a sale of securities for federal income tax purposes, we will not be treated as receiving the income from the securities for the purposes of determining whether we have complied with the requirement under Section 856(c)(2) of the Internal Revenue Code that at least 95% of our gross income, on an annual basis, is derived from dividends, interest, rents from real property, gain from the sale of stock, securities and real property, and certain other types of income (“95% Requirement”). However, we will be treated as receiving the payments under the Monthly Payments Right.

     We intend to treat the Monthly Payments Right as additional sales proceeds under the Repurchase Transaction with a portion of the amounts to be received treated as imputed interest. We intend to treat only the portion of the payments treated as imputed interest as gross income for purposes of the 95% Requirement. However, counsel has advised that it is uncertain whether the Monthly Payments Right should be treated as additional sales proceeds or whether any portion of the payments received under the Monthly Payments Right is qualifying income for the purposes of determining whether we have complied with the 95% Requirement and that our positions may not be upheld if challenged by the IRS. If the payments under the Monthly Payments Right are treated as income that is not qualifying income for the purposes of determining whether we have complied with the 95% Requirement, then it is likely that we will not be able to satisfy the 95% Requirement for our taxable year ended December 31, 2007.

     We have not sought a ruling from the Internal Revenue Service with respect to the characterization of the Repurchase Transaction as a sale of securities for federal income tax purposes, the qualification of the Repurchase Right as a qualifying asset for purposes of the 75% Requirement, nor the qualification of the payments under the Monthly Payments Right as either additional sales proceeds or qualifying income under the 95% Requirement.

     If we fail to satisfy either the 75% Requirement or the 95% Requirement, then we will not qualify as a REIT for our taxable year ended December 31, 2007 unless we are eligible for relief under one or more provisions of the Internal Revenue Code and pay a penalty tax. If we did not qualify as a REIT for 2007, there would be significant adverse consequences to us and our shareholders, including:

• we would not be allowed a deduction for distributions to our shareholders in computing taxable income and would be subject to U.S. federal income tax at regular corporate rates (currently we estimate that that we would have no taxable income for 2007; however, we would be subject to tax in subsequent years when we have taxable income);

• we could be subject to the U.S. federal alternative minimum tax, if any, and possibly increased state and local taxes; and

• unless statutory relief provisions apply, we could not elect to be taxed as a REIT until 2012.

In addition, if we are not a REIT for 2007 and subsequent years, we will not be required to make distributions to our shareholders, and all distributions to shareholders for 2007 and subsequent years will be subject to tax as regular corporate dividends to the extent of current and accumulated earnings and profits.

Liquidity and Capital Resources

     Traditional cash flow analysis may not be applicable for us as we have significant cash flow variability due to our investment activities. Our primary non-discretionary cash uses are our operating costs, pay-down of CMO debt, dividend payments and interest payments on our outstanding junior subordinated notes. As a REIT, we are required to pay dividends equal to 90% of our taxable income.

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     Through our use of short-term financing using Repurchase Agreements that revolved on a 30-day basis, we had exposure to market-driven liquidity events. As lenders used the declining market prices to value the securities financed, we were required to reduce with cash the amounts we borrowed. In some cases, lenders called for deposits of cash (“margin calls”) after an evaluation of recent fair value changes and before the maturity date of our Repurchase Agreement with them, which was usually 30 days from the origination or last roll. Through August 9, 2007, our lenders were regularly requiring us to repay a portion of amounts borrowed under our Repurchase Agreements. Although no lender terminated its Repurchase Agreement with us during the period prior to August 9, 2007, these repayments were a significant drain on our available cash. The increasing frequency and amount of required repayments in the period immediately prior to August 9, 2007 posed a threat to our ability to maintain our portfolio of Subordinate MBS. In response to these deteriorating market conditions, on August 10, 2007, we entered into a one-year fixed-rate financing facility for the full amount of the then outstanding Repurchase Agreement balances of approximately $81 million and we repaid substantially all of our then outstanding Repurchase Agreements.

     On August 10, 2007, we entered into a Master Repurchase Agreement and related Annex I thereto (as amended on October 3, 2007 and November 13, 2007) with RCG PB, Ltd, an affiliate of Ramius Capital Group, LLC (“Ramius”), in connection with a repurchase transaction with respect to our portfolio of Subordinate MBS. The purchase price of the securities in the Repurchase Transaction was $80,932,928. The fixed term of the Repurchase Transaction is one (1) year and contains no margin or call features. The Repurchase Transaction replaces substantially all of our outstanding Repurchase Agreements, both committed and non-committed, which previously financed our Subordinate MBS. However, the $20 million Amended and Restated Master Loan and Security Agreement by and between Greenwich Capital Financial Products, Inc. and us dated March 27, 2000, as amended, remains in place, as does our $200 million Master Repurchase Agreement dated September 22, 2006, by and between us and Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main Company.

     Pursuant to the Repurchase Transaction, we pay interest monthly at the annual rate of approximately 12%. Other consideration includes all principal payments received on the underlying mortgage securities during the term of the Repurchase Transaction, a premium payment at the termination of the Repurchase Transaction and the issuance of 600,000 shares of our common stock (equal to approximately 7.4% of our outstanding equity), all of which have been issued.

     If we default under the Repurchase Transaction, Ramius has customary remedies, including demanding that all assets be repurchased by us and retaining and/or selling the assets.

     Per the terms of the Repurchase Transaction, the repurchase price for the securities on the repurchase date of August 9, 2008, assuming no event of default has occurred prior thereto, will be an amount equal to the excess of (A) the sum of (i) the original purchase price of $80,932,928, (ii) $9,720,000, and (iii) $4,000,000 over (B) the excess of (i) all interest actually paid on the purchased securities (whether or not held by the Buyer), since August 10, 2007, over (ii) the sum of the “Monthly Additional Purchase Price Payments” (as defined below) paid by Ramius to us since August 10, 2007. The “Monthly Additional Purchase Price Payment” means, for each “Monthly Additional Purchase Price Payment Date”, which is further defined as the second Business day following the 25^th calendar day of each month prior to the Repurchase Date, an amount equal to the excess of (A) all interest actually paid on the purchased securities (whether or not held by the Buyer), since the preceding Monthly Additional Purchase Price Payment Date (or in the case of the first Monthly Additional Purchase Price Payment Date, August 10, 2007) over (B) $810,000.

     Our current operations under this Repurchase Transaction are not cash flow positive. At the termination of the agreement on August 9, 2008, we are required to repay the outstanding principal through cash or in-kind securities. We are seeking additional capital and are in discussions with potential investors, but no commitments or agreements have been reached. Additional sources of capital are required for us to generate positive cash flow and continue operations in the long-term, including retiring the Repurchase Transaction.

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     The following pro forma financial information is net interest income for the three and nine months ended September 30, 2007, as if the Repurchase Transaction was completed as of January 1, 2007 (dollars in thousands):

	Three months ended			Nine months ended
	September 30, 2007			September 30, 2007
Net interest income as reported	$	948		$	6,461
Add back: Subordinate MBS portfolio interest expense, as reported		3,575			6,475
		4,523			12,936
Deduct: Subordinate MBS portfolio coupon interest expense for the Repurchase Transaction		(2,430	)		(7,290	)
Deduct: Subordinate MBS portfolio interest expense, debt discount amortization (1) (2)		(2,286	)		(6,858	)
		(4,716	)		(14,148	)
Net interest income (loss), pro forma	$	(193	)	$	(1,212	)

(1)	The calculation of debt discount and corresponding amortization is an estimate of the amounts.
(2)	The component of the debt discount based upon the Company’s stock was valued as of the actual date of the closing, August 10, 2007.

     Our cash and cash equivalents as of September 30, 2007 decreased by $5.4 million from December 31, 2006. This decrease is due to paydowns on our Repurchase Agreements, partially offset by principal and interest payments received on MBS, proceeds from the sale of various securities and sales of our Agency MBS.

     In connection with the two committed borrowing facilities, we are required to maintain certain levels of cash and cash equivalents, tangible net worth, debt to tangible net worth and profitability. As of September 30, 2007, we were not in compliance with two of the covenants of our $20 million financing facility. Our agreement provides that we shall insure that, at all times, we maintain Tangible Net Worth of not less than $56,000,000, of which a minimum of $38,000,000 shall be comprised of Stockholders’ Equity (the “Maintenance of Tangible Net Worth Covenant”). In October 2007, we obtained, at no cost, a waiver of the Maintenance of Tangible Net Worth Covenant from the lender for the duration of 2007. In addition, as of September 30, 2007, our tangible net worth, as defined in our $200 million financing facility, is below the contractual level which allows us to finance the purchase of prime residential mortgage loans. Although the lender has not yet notified us that it intends to exercise any remedies due to our failure to maintain the required tangible net worth, such failure is a Static Pool Event under the agreement and basically prohibits drawing funds under the agreement without a waiver or cure of the covenant.

     We have no current commitments for any material capital expenditures. We primarily invest our available capital in our investment portfolio. We have historically invested a limited amount of our capital in the development of our software products, but have no future plans or commitments to invest further in this area.

Off-Balance Sheet Arrangements

     On August 28, 2006, we entered into a warehouse agreement for up to a $125 million warehousing facility, which is established and financed by a third party. The warehousing facility will enable us to acquire a diversified portfolio of mezzanine level, investment grade asset-backed securities, and certain other investments and assets in anticipation of the possible formation and issuance of a collateralized debt obligation. As of September 30, 2007, we have sold five investment grade securities into the warehousing facility with total sales proceeds of $5.7 million. If we do not form and issue a collateralized debt obligation, the warehouse agreement will expire and we will be liable for any losses incurred by the counterparty in connection with closing the warehousing facility and selling these securities. Due to the turmoil in the mortgage industry in the first nine months of 2007 and the lack of excess funds available to us, we have determined it is doubtful we can successfully issue the collateralized debt obligation in the short-term. As a result, we have recorded an expense of $483,000 for the nine months ended September 30, 2007 for the estimated cost of closing this facility as of September 30, 2007. If the collateralized debt obligation is completed, the securities will be transferred into the collateralized debt obligation at the sales proceeds amount. The term of the warehouse agreement as of September 30, 2007, is day-to-day or closing and issuance of the collateralized debt obligation.

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     We have forward commitments to sell mortgage-backed securities. As of September 30, 2007, we had a commitment to sell $30 million of to be announced Agency MBS in October 2007. The excess of the futures sales price over the market value of the securities as of September 30, 2007, is approximately $216,000, which is recorded in other assets. The forward sales commitments were settled in October 2007 with offsetting purchase commitments.

     Interest rate caps are used to economically hedge the changes in interest rates of the Company’s repurchase borrowings. As we established fixed-rate financing for our Subordinate MBS on August 10, 2007, the notional amount of the interest rate caps exceed the underlying borrowing exposure. However, our potential loss exposure for these instruments is limited to the fair market value of approximately $3,000 at September 30, 2007.

     As of September 30, 2007, we retained the credit risk on $2.8 million of mortgage securities that we sold with recourse in a prior year. Accordingly, we are responsible for credit losses, if any, with respect to these securities.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Quantitative Disclosure About Market Risk

     We believe our quantitative risk as of September 30, 2007, has not materially changed from our disclosure under Quantitative and Qualitative Disclosure About Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2006.

Qualitative Disclosure About Market Risk

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

Credit Risk

     We believe a principal risk to our investment strategy is the credit performance of the domestic, residential mortgage market. The credit exposure generally represents the amount of the mortgage loan in excess of the underlying real estate value, plus advances including carrying and maintenance costs that cannot be recouped from the homeowner for severely delinquent mortgage loans and foreclosures.

     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. This analysis includes review of the loan to value ratio of the mortgage loans and the credit rating of the homeowner. Additionally, we continually assess exogenous economic factors including housing prices and unemployment trends, on both national and regional levels.

     Increased credit risk manifests itself through a combination of increasing mortgage loan delinquencies and decreasing housing prices. Over the past year, the domestic residential housing market has experienced significant weakness in certain geographic areas due to a combination of weak local economic conditions, excess housing inventory, rising interest rates and tightened mortgage lending standards. We invest in securities collaterized by prime residential mortgage loans. This sector of the market represents the best quality credits and higher loan to value ratios. However, prime mortgages are still vulnerable to economic stresses. Should housing prices remain depressed and expand to other geographic areas we would expect delinquencies and credit losses to increase.

     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 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 all of our portfolios, pre-purchase due diligence and ongoing surveillance is performed. 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 at least a quarterly basis.

     Losses allocated to our retained subordinate bonds for the three and nine months ended September 30, 2007 and 2006 were nominal. The loan loss allowance as of September 30, 2007 totaled $0.2 million.

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  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 prime 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 generally purchase the securities in our Subordinate MBS portfolio with a significant purchase discount, which has an implicit loss component. Generally, to the extent any losses incurred are less than the implicit loss in the purchase discount, the credit losses will not have a significant impact on our operating results or the carrying value of the securities. However, any credit losses could have an impact on the overall cashflow projections for the securities and reduce the overall income potential of the securities.

     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 reviewed on a monthly basis for favorable and unfavorable credit performance and trends. Bonds that do not meet our credit criteria may be sold in a competitive bidding process (under our current credit facility, established by the Repurchase Transaction, when possible, the security would be replaced with a security that is substantially the same).

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

     During the first three quarters of 2007, credit spreads on subordinate bonds collateralized by prime-quality mortgage loans widened between 400 and 2,000 basis points, depending on the bond’s credit rating. The majority of the credit spread widening occurred during the third quarter of 2007. This increase in credit spreads has caused the portfolio value to decline approximately $44.0 million from December 31, 2006.

     The widening of credit spreads is attributable to several factors that we have observed in the mortgage markets:

• poor economic performance of bonds collateralized by sub-prime mortgage loans

• weakening residential housing markets in the form of lower market values and fewer sales

• increasing mortgage delinquency rates

• lower liquidity in the Collateralized Debt Obligation markets in the form of lesser demand from issuers and other investment managers.

     A direct effect of this credit spread widening was a substantial contraction in both the cost and availability of financing for all non-Agency mortgage-backed securities, including subordinate bonds collateralized by prime-quality mortgage loans.

     As of September 30, 2007 credit spreads for subordinate bonds collateralized by prime-quality mortgage loans were at the widest levels experienced since the Company began investing in this sector in the first half of 1999.

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     The following table shows the credit performance of the principal balance of underlying collateral of our Subordinate MBS portfolio:

Subordinate MBS Portfolio Credit Performance
(dollars in thousands)

	September 30, 2007										December 31, 2006
	Principal					# of					Principal					# of
	Balance		%			Loans		%			Balance		%			Loans		%
Current	$	39,292,579		99.04	%		74,673		98.96	%	$	46,111,855		99.42	%		85,783		99.40	%
30-59 days delinquent		206,283		0.52	%		407		0.54	%		189,117		0.41	%		361		0.42	%
60-89 days delinquent		54,524		0.14	%		113		0.15	%		36,315		0.08	%		67		0.08	%
90+ days delinquent		37,450		0.09	%		81		0.11	%		20,779		0.04	%		44		0.05	%
Foreclosure		56,011		0.14	%		116		0.15	%		18,208		0.04	%		44		0.05	%
Real Estate Owned		28,383		0.07	%		65		0.09	%		3,441		0.01	%		6		0.01	%

     We had losses of approximately $635,000 and $4,000 allocated to our Subordinate MBS portfolio for the nine months ended September 30, 2007 and 2006, respectively, excluding approximately $222,000 of losses incurred in September 2006 and reversed in January 2007.

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 (Excluding the Impact on Market Price)

     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. In general, we protect the interest rate spread on all of our investments through interest rate caps that are indexed to one-month LIBOR with a total notional amount of $60 million.

Mortgage Loan Portfolio

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

     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.

     The retained subordinate certificates from our 1999-B CMO 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 currently funded with a fixed-rate and fixed term Repurchase Agreement through August 9, 2008, which has eliminated variability in our interest expense. To the extent we enter into new Repurchase Agreements that re-price monthly at a rate equal to one-month LIBOR plus an interest rate margin for a subordinate security that is not also re-pricing on a monthly basis to one-month LIBOR, there is the potential for variability in our net interest income.

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Agency MBS Portfolio

     Our Agency MBS trading portfolio consists of fixed-rate bonds generally 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 Fannie Mae and Freddie Mac Agency MBS with the same coupon interest rates as our whole pools.

Prepayment Risk

     Prepayments have a direct effect on the amortization of purchase discounts/premiums and the market value of mortgage assets. In general, in a mortgage portfolio, as interest rates increase, prepayments will decline and as interest rates decrease, prepayments will increase. For our investments purchased at a discount, a decrease in prepayments will delay the accretion of the discount, which reduces the effective yield and lowers the market value of the investment. For our investments purchased at a premium, a decrease in prepayments will delay the amortization of the premium, which increases the effective yield and increases the market value of the investment.

Market Value Risk

     The market values of our investments are determined by a combination of interest rates, credit performance, prepayment speeds and asset specific performance attributes, such as loan to value ratios. In general, increases in interest rates and deteriorating credit performance 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.

     We manage the market value risk through management of the other market risks described above and analysis of other asset specific attributes. We selectively sell assets that do not meet our risk management guidelines and/or performance requirements. We manage the risk of increased financing margin requirements by maintaining a 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. Until August of 2007, our liquidity proved to be adequate. Later however, it was inadequate to support traditional financing arrangements because of unprecedented rapidly declining market values for the Subordinate MBS securities and demands from lenders for similarly rapid reduction in borrowings that required our cash. Under our current Repurchase Transaction which finances our Subordinate MBS portfolio through August 9, 2008, there are no calls related to declines in market values of the portfolio. This eliminates the need for our traditional liquidity requirements related to the portfolio financing.

Mortgage Loan Portfolio

     Our Mortgage Loan portfolio is term financed via CMO borrowings and, therefore, changes in the market value of the Mortgage Loan portfolio cannot trigger margin requirements. Mortgage Loans that are securitized in a CMO are classified as collateral for CMOs. Mortgage Loans that are designated as held for sale 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 investment and CMO collateral are reported at amortized cost, net of allowance for loan losses, if any. 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 or internal projections. As of September 30, 2007, one bond from the 2000-A securitization is financed through a $0.7 million Repurchase Agreement and is subject to margin requirements. A liquidity reserve is maintained per our liquidity policy.

Subordinate MBS Portfolio

     Securities in our Subordinate MBS portfolio are generally classified as available for sale and, therefore, changes in the market value are reported as a component of accumulated other comprehensive income. Any losses deemed other than temporary would be charged to income through impairment expense. Determination of market value is established through internally generated valuations. For the nine months ended September 30, 2007, we have observed significant declines in the estimated market value of our securities and have recorded these declines as impairment expense. See the Current Market Conditions and Material Events section for further information.

Agency MBS Portfolio

     Securities in our Agency MBS portfolio are generally classified as either trading or held to maturity. Changes in market value on our trading securities are included in income. Our trading securities are economically hedged with forward sales of like coupon Agency MBS and, therefore, changes in the market value of these assets will be substantially offset by similar changes in the value of the forward sales commitments. Agency securities classified as held to maturity are reported at amortized cost.

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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 third quarter of 2007 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

     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 operation.

Item 1A. Risk Factors

     Our Annual Report on Form 10-K for the year ended December 31, 2006 includes a detailed discussion of our risk factors. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.

     In particular, we previously disclosed in our Form 10-K the following Risks Related to Our Business:

o Mortgage-related assets are subject to risks, including borrower defaults or bankruptcies, special hazard losses, declines in real estate values, delinquencies and fraud;

o We may be unable to renew our borrowings at favorable rates or maintain longer-term financing, which may affect our profitability;

o Our profitability depends on the availability and prices of mortgage assets that meet our investment criteria;

o We are subject to various obligations related to our use of, and dependence on, debt;

o The loss of any of our executive officers could adversely affect our operating performance.

     The following supplements and updates the above-mentioned previously-disclosed risk factors, in light of the recent disruptions in the capital market and the mortgage industry:

Deteriorating debt and secondary mortgage market conditions have had and may continue to have a material adverse impact on our earnings and financial condition.

     Beginning in the second quarter of 2007 the mortgage industry and the residential housing market were adversely affected as home prices declined and delinquencies increased, particularly in the sub-prime mortgage industry. The difficulty that arose as a result of this has spread across various mortgage sectors, including the market in which we operate. We have significant financing needs that we meet through the capital markets, including the debt and secondary mortgage markets. These markets are currently experiencing unprecedented disruptions, which have had and continue to have an adverse impact on the Company’s earnings and financial condition.

     Current conditions in the debt markets include reduced liquidity and increased credit risk premiums for certain market participants. These conditions, which increase the cost, and reduce the availability of debt may continue or worsen in the future. We recently entered into a Master Repurchase Agreement with RCG PB, Ltd., an affiliate of Ramius Capital Group, LLC (“Ramius”) (the “Repurchase Transaction”), through which we expect will assist us in mitigating the impact of the debt market disruptions. However, the term of the Repurchase Transaction is for one year at a cost that causes us to be cash-flow negative. There can be no assurances that we will be able to renew this facility after one year on favorable terms (providing positive cash-flow), or obtain replacement financing if we cannot renew this facility. If overall market conditions continue to deteriorate and result in additional substantial declines in the value of the assets which we use to collateralize our secured borrowing arrangements, sufficient capital may not be available to support the continued ownership of our investments, requiring certain assets to be sold at a loss.

     The secondary mortgage markets are also currently experiencing unprecedented disruptions resulting from reduced investor demand for mortgage loans and mortgage-backed securities and increased investor yield requirements for those loans and securities. These conditions may continue or worsen in the future and have, and continue to have, an adverse impact on our earnings and financial condition including our ability to continue as a going concern.

Further reductions in our workforce could adversely affect our operating performance and/or our ability to generate and issue timely financial information.

     Primarily as a result of the January 2007 sale of the assets of our primary operating subsidiary, and due to attrition, our workforce has been reduced to approximately 17 employees. A further loss of employees within a relatively short time period, together with our inability to replace these employees with comparably skilled employees within a reasonable timeframe, could adversely affect our operations and/or we could experience delays in generating and issuing financial information.

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     We previously disclosed in our Form 10-K the following Risks Related to Our Status as a REIT and Our 40 Act Exemption: Regulation as an investment company could materially and adversely affect our business; efforts to avoid regulation as an investment company could limit our operations; If we do not maintain our status as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability.

     The following supplements and updates the above-mentioned previously-disclosed risk factors, in light of the recent and unprecedented disruptions in the capital market and the mortgage industry:

Our failure to comply with the Investment Company Act of 1940 could materially and adversely affect the Company’s financial condition and results of operations.

     On August 15, 2007, we sold our entire portfolio of Agency MBS. This portfolio was held primarily to meet certain exemptive provisions of the 40 Act. The sales were necessary in order to generate additional liquidity and to close existing borrowing positions with lenders that was a condition of the consummation of the Repurchase Transaction. On August 29, 2007, we financed the acquisition of approximately $30 million of Agency MBS with 30-day revolving Repurchase Agreements. As a result, we maintained compliance with the 40 Act during the quarter ended September 30, 2007.

     The Repurchase Agreement relating to the Agency MBS, which we purchased on August 29, 2007, is for a 30-day revolving period, can be terminated by the lender on any renewal date, and is subject to partial repayments based upon market values and changes in the borrowing percentages. If this Repurchase Agreement is terminated, we may not be able to obtain financing for Agency MBS with any other lender. In addition, we may not have enough funds that would allow us to own a sufficient amount of Agency MBS or mortgage loans to maintain compliance with the 40 Act. If the Company is unable to maintain compliance with the 40 Act, the Company could, among other things, change the manner in which the Company conducts its operations, or register as an investment company under the 40 Act, either of which could have a material adverse effect on our operations, our governance costs and the market price for our common stock.

If certain tax positions we intend to take regarding the Repurchase Transaction with Ramius are challenged by the Internal Revenue Service, it could result in adverse tax consequences to us and could affect our status as a REIT.

     Under the Repurchase Transaction, we have agreed with Ramius that we intend to treat the Repurchase Transaction as a sale of securities for U.S. federal income tax purposes. We and Ramius agreed to file all tax returns consistent with such intent and not to take any contrary position unless required by applicable law. Under the Repurchase Transaction we have the right, on August 9, 2008, to repurchase the securities under the Repurchase Transaction for approximately $85 million assuming all other conditions have been satisfied (“the Repurchase Right”). In addition, we have the right to receive Monthly Additional Repurchase Price Payments equal to the excess of all interest payments received on the securities under the Repurchase Transaction in excess of $810,000 (the “Monthly Payments Right”).

     If the Repurchase Transaction is treated as a sale of securities for federal income tax purposes, we will not be treated as owning the securities for the purposes of determining whether we have complied with the requirement under Section 856(c)(4) of the Internal Revenue Code that at least 75 percent of the value of our total assets are represented by real estate assets, cash, cash equivalents and Government securities at the end of each calendar quarter (“75% Requirement”). However, the Repurchase Right and the Monthly Payments Right would be considered assets for purposes of determining whether we satisfy the 75% Requirement.

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     We intend to treat the Repurchase Right as a qualifying real estate asset for purposes of the 75% Requirement and to treat the Monthly Payments Right as a non-qualifying asset. Counsel has advised that it is uncertain whether the Repurchase Right constitutes a qualifying real estate asset for purposes of the 75% Requirement and that our position may not be upheld if challenged by the IRS. If the IRS were to deem that the Repurchase Right is not a qualifying asset for purposes of the 75% Requirement, and the value of the Repurchase Right together with our other non-qualifying assets exceeds 25% of our assets, then we would not have satisfied the 75% Requirement for the quarter ended September 30, 2007, or in any future quarter in which the value of the Repurchase Right together with our other non-qualifying assets exceeds 25% of our assets. We have obtained an independent valuation of the Repurchase Right under the Repurchase Transaction as of September 30, 2007. Based upon this valuation, we believe that we have satisfied the 75% Requirement for the quarter ended September 30, 2007 even if the Repurchase Right is a non-qualifying asset. However, this valuation may be subject to challenge by the IRS, and there can be no assurance that the valuation would be upheld in the event of such challenge. Further, the value of the Repurchase Right is expected to increase each quarter as the exercise date of the Repurchase Right approaches. As a result, if the Repurchase Right were to be treated as a non-qualifying asset for the 75% Requirement, we may not be able to satisfy the 75% Requirement in future quarters based on the increasing values.

     If the Repurchase Transaction is treated as a sale of securities for federal income tax purposes, we will not be treated as receiving the income from the securities for the purposes of determining whether we have complied with the requirement under Section 856(c)(2) of the Internal Revenue Code that at least 95% of our gross income, on an annual basis, is derived from dividends, interest, rents from real property, gain from the sale of stock, securities and real property, and certain other types of income (“95% Requirement”). However, we will be treated as receiving the payments under the Monthly Payments Right.

     We intend to treat the Monthly Payments Right as additional sales proceeds under the Repurchase Transaction with a portion of the amounts to be received treated as imputed interest. We intend to treat only the portion of the payments treated as imputed interest as gross income for purposes of the 95% Requirement. However, counsel has advised that it is uncertain whether the Monthly Payments Right should be treated as additional sales proceeds or whether any portion of the payments received under the Monthly Payments Right is qualifying income for the purposes of determining whether we have complied with the 95% Requirement and that our positions may not be upheld if challenged by the IRS. If the payments under the Monthly Payments Right are treated as income that is not qualifying income for the purposes of determining whether we have complied with the 95% Requirement, then it is likely that we will not be able satisfy the 95% Requirement for our taxable year ended December 31, 2007.

     We have not sought a ruling from the Internal Revenue Service with respect to the characterization of the Repurchase Transaction as a sale of securities for federal income tax purposes, the qualification of the Repurchase Right as a qualifying asset for purposes of the 75% Requirement, nor the qualification of the payments under the Monthly Payments Right as either additional sales proceeds or qualifying income under the 95% Requirement.

     If we fail to satisfy either the 75% Requirement or the 95% Requirement, then we will not qualify as a REIT for our taxable year ended December 31, 2007 unless we are eligible for relief under one or more provisions of the Internal Revenue Code and pay a penalty tax. If we did not qualify as a REIT for 2007, there would be significant adverse consequences to us and our shareholders, including:

• we would not be allowed a deduction for distributions to our shareholders in computing taxable income and would be subject to U.S. federal income tax at regular corporate rates (currently we estimate that that we would have no taxable income for 2007; however, we would be subject to tax in subsequent years when we have taxable income);

• we could be subject to the U.S. federal alternative minimum tax, if any, and possibly increased state and local taxes; and

• unless statutory relief provisions apply, we could not elect to be taxed as a REIT until 2012.

In addition, if we are not a REIT for 2007 and subsequent years, we will not be required to make distributions to our shareholders, and all distributions to shareholders for 2007 and subsequent years will be subject to tax as regular corporate dividends to the extent of current and accumulated earnings and profits.

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

     In connection with the Repurchase Transaction, the Company issued 600,000 shares of its common stock to Ramius on August 23, 2007, upon the approval of such shares for listing on the American Stock Exchange. See the Company’s Current Report on Form 8-K, as filed with the SEC on August 16, 2007 for a description of this issuance.

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

     In its Current Report on Form 8-K (the “Original 8-K”) filed on August 16, 2007, the Company reported that on August 10, 2007 it had entered into a Master Repurchase Agreement (the “Master Agreement”) and related Annex I thereto (“Annex I” and, together with the “Master Agreement,” the “MRA”) with RCG PB, Ltd (“Ramius”), an affiliate of Ramius Capital Group, LLC, in connection with a repurchase transaction with respect to the Company’s portfolio of subordinate mortgage-backed-securities.

     On October 3, 2007, the Company entered into an Amended and Restated Annex I to the Master Agreement (the “Amended Annex I”) with Ramius. The Amended Annex I amended Annex I to provide specifically that Ramius may sell the securities subject to the MRA and may satisfy its redelivery obligation by delivering substantially similar securities instead of the specific securities sold to it by the Company under the MRA. All of the other material terms of the MRA described in the Original 8-K remain in effect under the Master Agreement and the Amended Annex I.

     On November 13, 2007, the Company entered into a Second Amended and Restated Annex I to the Master Agreement (the “Second Amended Annex I”) with Ramius. The Second Amended Annex I amends Annex I to make a technical correction to the language which addressed Ramius’ right to satisfy its redelivery obligation by delivering securities which are “substantially the same” as the specific securities sold to it by the Company under the MRA. All of the other material terms of the MRA described in the Original 8-K remain in effect under the Master Agreement, the Amended Annex I and the Second Amended Annex I.

     A copy of the Master Agreement and Second Amended Annex I thereto is attached as Exhibit 10.38.11 hereto and incorporated herein by reference.

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: November 19, 2007
	By:	/s/ HAROLD F. MCELRAFT
		Harold F. McElraft
		Chief Financial Officer and Treasurer
		(Principal Financial and
		Accounting Officer)
Dated: November 19, 2007

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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(30)	Bylaws of Registrant, as amended on November 1, 2007
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
4.6(19)	Amended and Restated Declaration of Trust, dated as of November 4, 2005, among Registrant, as depositor, Wilmington Trust Company, as Institutional trustee and Delaware trustee, the administrative trustees named therein and the holders from time to time of the individual beneficial interests in the asset of the trust
4.7(19)	Junior Subordinated Indenture, dated as of November 4, 2005, between Wilmington Trust Company and Registrant.
4.8(19)	Form of Junior Subordinated Debt Security due 2035, issued November 4, 2005
4.9(19)	Form of Floating Rate TRUPS(R) Certificate issued November 4, 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
10.10.2 (25)	Separation and General Release Agreement dated January 31, 2007 between Joyce S. Mizerak and Registrant.
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. (25)	Separation and General Release Agreement dated December 29, 2006 between George J. Ostendorf and Registrant.

48

Exhibit	Description
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(16)	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
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.
10.13.5(18)	Sixth Modification of Lease Agreement dated August 3, 2005 by and between Metroplex Associates and HanoverTrade Inc.
10.13.6(19)	Seventh Modification of Lease Agreement dated December 16. 2005 by and between Metroplex Associates and Hanover Capital Partners 2, 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
10.17(18)	Office Lease Agreement dated August 3, 2005 by and between Metroplex Associates and HanoverTrade Inc.
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

49

Exhibit	Description
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.
10.31.6(18)	Amendment Number Nine dated as of April 18, 2005 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.
10.31.7(18)	Amendment Number Ten dated as of May 5, 2005 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.
10.31.8(18)	Amendment Number Eleven dated as of May 16, 2005 to be Amended and Restated Master Loans and Security Agreement dated as of March 27, 2000 by and among Registrant Hanover Capital Partners, Ltd. and Greenwich Financial Products, Inc.
10.31.9(19)	Amendment Number Twelve Dated as of January 31, 2006 of the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000, by and among Registrant, Hanover Capital Partners 2, Ltd. and Greenwich Financial Products, Inc.
10.31.10(20)	Amendment Number Thirteen Dated as of March 31, 2006, of the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000, by and among Registrant and Greenwich Financial Products, Inc.
10.31.11(21)	Amendment Number Fourteen dated as of May 18, 2006, of the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000, by and among the Registrant and Greenwich Financial Products, Inc.
10.31.12(21)	Amendment Number Fifteen dated as of June 14, 2006, of the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000, by and among the Registrant and Greenwich Financial Products, Inc.
10.31.13(26)	Amendment Number Sixteen dated as of June 13, 2007, of the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000, by and among the Registrant and Greenwich Financial Products, Inc.
10.31.14(27)	Amendment Number Seventeen dated as of July 11, 2007 of the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000, by and among the Registrant and Greenwich Financial Products, Inc.
10.31.15(31)	Waiver dated October 22, 2007 pertaining to the Amended and Restated Master Loan and Security Agreement dated as of March 27, 2000, by and among the Registrant and Greenwich 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
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
10.36.6(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 Harold F. McElraft, 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

50

Exhibit	Description
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(16)	Indemnity Agreement by and between Registrant and Harold F. McElraft, dated as of April 14, 2005
10.36.18(19)	Indemnity Agreement by and between Registrant and Suzette Berrios, dated as of November 28, 2005
10.37(15)	Purchase Agreement, dated February 24, 2005, among Registrant, Hanover Statutory Trust I and Taberna Preferred Funding I, Ltd.
10.38(17)	Master Repurchase Agreement between Sovereign Bank, as Buyer, and Registrant and Hanover Capital Partners Ltd, as Seller, dated as of June 28, 2005
10.38.2(19)	Assignment, Assumption and Recognition Agreement dated January 20, 2006 among the Registrant, Hanover Capital Partners 2, Ltd. and Sovereign Bank
10.38.3(19)	Assignment, Assumption and Recognition Agreement dated January 20, 2006 among the Registrant, Hanover Capital Partners 2, Ltd., Sovereign Bank and Deutsche Bank National Trust Company
10.38.4(20)	ISDA Master Agreement dated April 3, 2006, by and among Registrant and SMBC Derivative Products Limited
10.38.5(22)	Master Repurchase Agreement dated June 22, 2006, by and among Registrant and Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main Company
10.38.6(23)	Warehouse Agreement between Merrill Lynch International and Hanover Capital Mortgage Holdings, Inc., dated as of August 28, 2006.
10.38.7 (25)	Asset Purchase Agreement by and between Registrant and Terwin Acquisition I, LLC, dated as of January 12, 2007
10.38.8 (28)	Master Repurchase Agreement and Annex I thereto between RCG, Ltd., as Buyer, and Hanover Capital Mortgage Holdings, Inc., as Seller, dated as of August 10, 2007.
10.38.9 (28)	Stock Purchase Agreement between RCG, Ltd. and Hanover Capital Mortgage Holdings, Inc., dated August 10, 2007
10.38.10 (29)	Master Repurchase Agreement, dated as of August 10, 2007, and Amended and Restated Annex I thereto, dated as of October 3, 2007, between RCG, Ltd., as Buyer, and Hanover Capital Mortgage Holdings, Inc., as Seller.
10.38.11 (31)	Master Repurchase Agreement, dated as of August 10, 2007, and Second Amended and Restated Annex I thereto, dated as of November 13, 2007, between RCG, Ltd., as Buyer, and Hanover Capital Mortgage Holdings, Inc., as Seller.
16.1(11)	Letter from Deloitte & Touche LLP, dated February 23, 2004
31.1(31)	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 (31)	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
32.1 (32)	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.

51

(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)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission on March 16, 2005.
(17)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 4, 2005.
(18)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended June 30, 2005, as filed with the Securities and Exchange Commission on August 9, 2005.
(19)	Incorporated herein by reference to Registrant’s Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on March 16, 2006.
(20)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended March 31, 2006, as filed with the Securities and Exchange Commission on May 10, 2006.
(21)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on June 20, 2006.
(22)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on June 28, 2006.
(23)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on September 1, 2006.
(24)	Incorporated herein by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2006, as filed with the Securities and Exchange Commission on November 9, 2006.
(25)	Incorporated herein by reference to Registrant’s Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on March 16, 2007.
(26)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on June 14, 2007.
(27)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on July 11, 2007.
(28)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 16, 2007.
(29)	Incorporated herein by reference to Registrant’s Form 8-K/A filed with the Securities and Exchange Commission on October 10, 2007.
(30)	Incorporated herein by reference to Registrant’s Form 8-K filed with the Securities and Exchange Commission on November 7, 2007.
(31)	Filed herewith.
(32)	Furnished herewith.

52

EX-10.31.15

Exhibit 10.31.15

Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830

October 22, 2007

Hanover Capital Mortgage Holdings, Inc.
200 Metroplex Drive, Suite 100
Edison, New Jersey 08817
Attention: Chief Financial Officer

Re: Amended and Restated Master Loan and Security Agreement —
Maintenance of Tangible Net Worth Covenant

Ladies and Gentlemen:

     Reference is hereby made to the Amended and Restated Master Loan and Security Agreement, dated as of March 27, 2000, by and between HANOVER CAPITAL MORTGAGE HOLDINGS, INC. (the “Borrower”) and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. (the “Lender”), as amended (the “Agreement”). Capitalized terms used but not defined herein shall have the meanings set forth in the Agreement.

     Pursuant to Section 7.09(a) of the Agreement, the Borrower has agreed that the Borrower shall insure that, at all times, it maintains Tangible Net Worth of not less then $56,000,000, of which a minimum of $38,000,000 shall be comprised of Stockholder’s Equity (the “Maintenance of Tangible Net Worth Covenant”).

     The Lender hereby acknowledges that the Borrower was not in compliance with the Maintenance of Tangible Net Worth Covenant as of September 30,, 2007. With regard to such failure on such date and continuing through and including December 31, 2007,, the Lender hereby waives its right pursuant to Section 8 of the Agreement to declare an Event of Default under the Agreement and hereby agrees that such failure as of such date, and continuing through and including December 31, 2007, shall not be deemed to be a breach of any representations, warranties or financial covenant in the Agreement, provided no other Events of Default occur during such period.

     The parties hereto acknowledge and agree that subject to the provisions of this waiver letter, the provisions of the Agreement remain in full force and effect and that the execution of this waiver letter by the Lender does not operate as a waiver of any of its rights, powers, or privileges under the Agreement or under any of the other Governing Agreements, including without limitation any future breaches of, or Defaults or Events of Default under, the Agreement, including any based on the failure by the Borrower to satisfy all or any portion of the Maintenance of Tangible Net Worth Covenant at any time other than for the period September 30, 2007 through and including December 31, 2007.

     This waiver letter constitutes the entire agreement relating to the subject matter hereof between the parties hereto and supersedes any prior oral or written agreement between the parties hereto.

     This waiver letter shall be construed in accordance with the laws of the State of New York and the obligations, rights, and remedies of the parties hereunder shall be determined in accordance with such laws without regard to conflict of laws doctrine applied in such state (other than Sections 5-1401 and 5-1402 of the New York General Obligations Law).

     This waiver letter may be executed in any number of counterparts, each of which (including any copy hereof delivered by facsimile) shall constitute one and the same original instrument, and either party hereto may execute this waiver letter by signing any such counterpart.

[signature page follows]

     Please confirm that the foregoing specifies the terms of our agreement by signing and returning the enclosed copy of this waiver letter to Greenwich Capital Financial Products, Inc., at 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Craig Eckes.

Very truly yours,
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By:	/s/ John Barbera
Name:	John Barbera
Title:	Senior Vice President

Acknowledged and Agreed:

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

By:	/s/ John A. Burchett
Name:	John A. Burchett
Title:	Chairman, President

EX-10.38.11

EXHIBIT 10.38.11

Master Repurchase
Agreement

September 1996 Version

Dated as of August 10, 2007

Between: RCG PB, Ltd, as Buyer (the “Buyer”) and Hanover Capital Mortgage Holdings, Inc., as Seller (the “Seller”)

1.	Applicability
	From time to time the parties hereto may enter into transactions in which one party (“Seller”) agrees to transfer to the other (“Buyer”) securities or other assets (“Securities”) against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a “Transaction” and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto and in any other annexes identified herein or therein as applicable hereunder.
2.	Definitions

(a) “Act of Insolvency”, with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by such party of a general assignment for the benefit of creditors, or (iv) the admission in writing by such party of such party’s inability to pay such party’s debts as they become due;

(b)	“Additional Purchased Securities”, Securities provided by Seller to Buyer pursuant to Paragraph 4 (a) hereof;
(c)	“Buyer’s Margin Amount”, with respect to any Transaction as of any date, the amount obtained by application of the Buyer’s Margin Percentage to the Repurchase Price for such Transaction as of such date;
(d)	“Buyer’s Margin Percentage”, with respect to any Transaction as of any date, a percentage (which may be equal to the Seller’s Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction;
(e)	“Confirmation”, the meaning specified in Paragraph 3(b) hereof;
(f)	“Income”, with respect to any Security at any time, any principal thereof and all interest, dividends or other distributions thereon;
(g)	“Margin Deficit”, the meaning specified in Paragraph 4(a) hereof;
(h)	“Margin Excess”, the meaning specified in Paragraph 4(b) hereof;
(i)	“Margin Notice Deadline”, the time agreed to by the parties in the relevant Confirmation, Annex I hereto or otherwise as the deadline for giving notice requiring same-day satisfaction of margin maintenance obligations as provided in Paragraph 4 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice);
(j)	“Market Value”, with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued Income to the extent not included therein (other than any Income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities);
(k)	“Price Differential”, with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction);
(l)	“Pricing Rate”, the per annum percentage rate for determination of the Price Differential;
(m)	“Prime Rate”, the prime rate of U.S. commercial banks as published in The Wall Street Journal (or, if more than one such rate is published, the average of such rates);

Master Repurchase Agreement

2

(n)	“Purchase Date”, the date on which Purchased Securities are to be transferred by Seller to Buyer;
(o)	“Purchase Price”, (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, except where Buyer and Seller agree otherwise, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4 (a) hereof or applied to reduce Seller’s obligations under clause (ii) of Paragraph 5 hereof;
(p)	“Purchased Securities”, the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term “Purchased Securities” with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) hereof and shall exclude Securities returned pursuant to Paragraph 4 (b) hereof;
(q)	“Repurchase Date”, the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraph 3(c) or 11 hereof;
(r)	“Repurchase Price”, the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination;
(s)	“Seller’s Margin Amount”, with respect to any Transaction as of any date, the amount obtained by application of the Seller’s Margin Percentage to the Repurchase Price for such Transaction as of such date;
(t)	“Seller’s Margin Percentage”, with respect to any Transaction as of any date, a percentage (which may be equal to the Buyer’s Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction.

3. Initiation; Confirmation; Termination

(a)

An agreement to enter into a Transaction may be made orally or in writing at the initiation of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller.

(b)

Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a “Confirmation”). The Confirmation shall describe the Purchased Securities (including CUSIP number, if any), identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the

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Transaction not inconsistent with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail.

(c)

In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to an account of Buyer.

4. Margin Maintenance

(a)	If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer’s Margin Amount for all such Transactions (a “Margin Deficit”), then Buyer may by notice to Seller require Seller in such Transactions, at Seller’s option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer (“Additional Purchased Securities”), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer’s Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller).
(b)	If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller’s Margin Amount for all such Transactions at such time (a “Margin Excess”), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer’s option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller’s Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer).
(c)	If any notice is given by Buyer or Seller under subparagraph (a) or (b) of this Paragraph at or before the Margin Notice Deadline on any business day, the party receiving such notice shall transfer cash or Additional Purchased Securities as provided in such subparagraph no later than the close of business in the relevant market on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such cash or Securities no later than the close of business in the relevant market on the next business day following such notice.

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(d)	Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by Buyer and Seller.
(e)	Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Deficit or Margin Excess, as the case may be, exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions).
(f)	Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) and (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement).

5.

Income Payments

Seller shall be entitled to receive an amount equal to all Income paid or distributed on or in respect of the Securities that is not otherwise received by Seller, to the full extent it would be so entitled if the Securities had not been sold to Buyer. Buyer shall, as the parties may agree with respect to any Transaction (or, in the absence of any such agreement, as Buyer shall reasonably determine in its discretion), on the date such Income is paid or distributed either (i) transfer to or credit to the account of Seller such Income with respect to any Purchased Securities subject to such Transaction or (ii) with respect to Income paid in cash, apply the Income payment or payments to reduce the amount, if any, to be transferred to Buyer by Seller upon termination of such Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence (A) to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit, or (B) if an Event of Default with respect to Seller has occurred and is then continuing at the time such Income is paid or distributed.

6.  Security Interest

Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all Income thereon and other proceeds thereof.

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7.  Payment and Transfer

Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request, (ii) shall be transferred on the book-entry system of a Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer.

8.  Segregation of Purchased Securities

To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial or securities intermediary or a clearing corporation. All of Seller’s interest in the Purchased Securities shall pass to Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise selling, transferring, pledging or hypothecating the Purchased Securities, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Securities to Seller pursuant to Paragraph 3, 4 or 11 hereof, or of Buyer’s obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof.

Required Disclosure for Transactions in Which the Seller Retains Custody of the Purchased Securities

Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer’s securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If Buyer grants the right to substitute, this means that Buyer’s securities will likely be commingled with Seller’s own securities during the trading day. Buyer is advised that, during any trading day that Buyer’s securities are commingled with Seller’s securities, they [will] * [may] ** be subject to liens granted by Seller to [its clearing bank] * [third parties] ** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller’s ability to resegregate substitute securities for Buyer will be subject to Seller’s ability to satisfy [the clearing] * [any] ** lien or to obtain substitute securities.

* Language to be used under 17 C.F.R. 13403.4(e) if Seller is a government securities broker or dealer other than a financial institution.

** Language to be used under 17 C.F.R. 13403.5(d) if Seller is a financial institution.

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9. Substitution

(a)

Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities.

(b)

In Transactions in which Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities; provided, however, that such other Securities shall have a Market Value at least equal to the Market Value of the Purchased Securities for which they are substituted.

10.	Representations
	Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) it will engage in such Transactions as principal (or, if agreed in writing, in the form of an annex hereto or otherwise, in advance of any Transaction by the other party hereto, as agent for a disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, bylaw or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it.
11.	Events of Default
	In the event that (i) Seller fails to transfer or Buyer fails to purchase Purchased Securities upon the applicable Purchase Date, (ii) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (iii) Seller or Buyer fails to comply with Paragraph 4 hereof, (iv) Buyer fails, after one business day’s notice, to comply with Paragraph 5 hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vii) Seller or Buyer shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder (each an “Event of Default”):

(a) The nondefaulting party may, at its option (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), declare an Event of Default to have occurred hereunder and, upon the exercise or deemed exercise of such option, the Repurchase Date for each Transaction hereunder shall, if it has not already

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occurred, be deemed immediately to occur (except that, in the event that the Purchase Date for any Transaction has not yet occurred as of the date of such exercise or deemed exercise, such Transaction shall be deemed immediately canceled). The nondefaulting party shall (except upon the occurrence of an Act of Insolvency) give notice to the defaulting party of the exercise of such option as promptly as practicable.

(b)	In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party’s obligations in such Transactions to repurchase all Purchased Securities, at the Repurchase Price therefor on the Repurchase Date determined in accordance with subparagraph (a) of this Paragraph, shall thereupon become immediately due and payable, (ii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder, and (iii) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party’s possession or control.
(c)	In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, all right, title and interest in and entitlement to all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party.
(d)	If the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, the nondefaulting party, without prior notice to the defaulting party, may:

(i)

as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and

(ii)

as to Transactions in which the defaulting party is acting as Buyer, (A) immediately purchase, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, securities (“Replacement Securities”) of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such

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date, obtained from a generally recognized source or the most recent closing offer quotation from such a source.

Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the Securities subject to any Transaction hereunder are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, the nondefaulting party may establish the source therefor in its sole discretion and (3) all prices, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities).

(e)	As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party for any excess of the price paid (or deemed paid) by the nondefaulting party for Replacement Securities over the Repurchase Price for the Purchased Securities replaced thereby and for any amounts payable by the defaulting party under Paragraph 5 hereof or otherwise hereunder.
(f)	For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of the option referred to in subparagraph (a) of this Paragraph.
(g)	The defaulting party shall be liable to the nondefaulting party for (i) the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of a Transaction.
(h)	To the extent permitted by applicable law, the defaulting party shall be liable to the nondefaulting party for interest on any amounts owing by the defaulting party hereunder, from the date the defaulting party becomes liable for such amounts hereunder until such amounts are (i) paid in full by the defaulting party or (ii) satisfied in full by the exercise of the nondefaulting party’s rights hereunder. Interest on any sum payable by the defaulting party to the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate.
(i)	The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law.

12.

Single Agreement

Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance

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	of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted.
13.	Notices and Other Communications
	Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address specified in Annex II hereto, or so sent to such party at any other place specified in a notice of change of address hereafter received by the other. All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence.
14.	Entire Agreement; Severability
	This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement.
15.	Non-assignability; Termination

(a)

The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party, and any such assignment without the prior written consent of the other party shall be null and void. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be terminated by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding.

(b)

Subparagraph (a) of this Paragraph 15 shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under Paragraph 11 hereof.

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16.	Governing Law
	This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof.
17.	No Waivers, Etc.
	No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date.
18.	Use of Employee Plan Assets

(a)	If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 (“ERISA”) are intended to be used by either party hereto (the “Plan Party”) in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed.
(b)	Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition.
(c)	By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller’s latest such financial statements, there has been no material adverse change in Seller’s financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party.

19. Intent

(a) The parties recognize that each Transaction is a “repurchase agreement” as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a “securities contract” as that term is defined in Section 741 of Title 11 of the United States Code, as amended (except insofar

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as the type of assets subject to such Transaction would render such definition inapplicable).

(b)	It is understood that either party’s right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended.
(c)	The parties agree and acknowledge that if a party hereto is an “insured depository institution,” as such term is defined in the Federal Deposit Insurance Act, as amended (“FDIA”), then each Transaction hereunder is a “qualified financial contract,” as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplicable).
(d)	It is understood that this Agreement constitutes a “netting contract” as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a “covered contractual payment entitlement” or “covered contractual payment obligation”, respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a “financial institution” as that term is defined in FDICIA).

20.	Disclosure Relating to Certain Federal Protections
	The parties acknowledge that they have been advised that:

(a)	in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission (“SEC”) under Section 15 of the Securities Exchange Act of 1934 (“1934 Act”), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 (“SIPA”) do not protect the other party with respect to any Transaction hereunder;
(b)	in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and
(c)	in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable.

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RCG PB, LTD, as Buyer
By:	/s/ Jeffrey M. Solomon
Name:	Jeffrey M. Solomon
Title:	Authorized Signatory
HANOVER CAPITAL MORTGAGE HOLDINGS, INC., as Seller
By:	/s/ John A. Burchett
Name:	John A. Burchett
Title:	Chairman, President and Chief Executive Officer

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(Hanover)

S-1

SECOND AMENDED AND RESTATED ANNEX I

SUPPLEMENTAL TERMS AND CONDITIONS

This Second Amended and Restated Annex I (this “Annex I”), dated as of November 13, 2007, forms a part of the TBMA Master Repurchase Agreement (September 1996 Version) dated as of August 10, 2007 (the “Master Agreement” and, together with this Second Amended and Restated Annex I, Annex II and any schedules and exhibits hereto or thereto, this “Agreement”), between Hanover Capital Mortgage Holdings, Inc., as the Seller (the “Seller”) and RCG PB, Ltd, as buyer (the “Buyer”). Capitalized terms used but not defined in this Annex I shall have the meanings ascribed to them in the Master Agreement. To the extent that this Annex I conflicts with the terms of the Master Agreement, this Annex I shall control.

     All references to Buyer in the Agreement shall be deemed to be references to RCG PB, Ltd, and except as is otherwise expressly provided in this Annex I to the contrary, any reference to “Seller” in the Master Agreement shall be construed to mean a reference to Hanover Capital Mortgage Holdings, Inc.

     1. DEFINITIONS.

     (a) For purposes of the Agreement and this Annex I, the following terms shall have the following meanings:

     “Act of Insolvency” means the occurrence of either of the following with respect to any Person:

     (a) (i) any case, proceeding, petition or action shall be commenced or filed, without such Person’s application or consent, in any court, seeking the liquidation, reorganization, debt arrangement, dissolution, winding up, or composition or readjustment or relief of debts of such Person, the appointment of a trustee, receiver, custodian, liquidator, assignee, sequestrator or the like for such Person or all or substantially all of such Person’s assets, or any assignment for the benefit of the creditors of such Person, or (ii) any similar case, proceeding, petition or action with respect to such Person under any law relating to bankruptcy, insolvency, reorganization, winding up or composition or adjustment of debts shall be commenced or filed against such Person, and such case, proceeding, petition or action shall continue undismissed, or unstayed and in effect, for a period of 15 consecutive days; or an order for relief in respect of such Person shall be entered in an involuntary case under the Bankruptcy Code or other similar laws now or hereafter in effect; or

     (b) such Person shall commence or file a voluntary case or other proceeding under any applicable bankruptcy, insolvency, reorganization, debt arrangement, dissolution or other similar law now or hereafter in effect (including, without limitation, under Section 301 of the Bankruptcy Code), or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for, such Person or for substantially all of its property, or shall make any general assignment for the benefit of creditors, or shall fail to, or admit in

Annex I-1

writing its inability to, pay its debts generally as they become due, or its board of directors or managers shall vote to implement any of the foregoing.

     “Affiliate” when used with respect to a Person means any other Person controlling, controlled by, or under common control with, such Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities (including, without limitation, partnership interests), by contract or otherwise and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

     “Bankruptcy Code” means the United States Bankruptcy Reform Act of 1978, as amended.

     “Business Day” means any day other than a Saturday or Sunday or a day when banks are authorized or required by law to close in New York, New York.

     “Code” means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time, and any successor statute of similar import, in each case as in effect from time to time. References to sections of the Code also refer to any successor sections.

     “Default” means any event, that, with the giving of notice or the passage of time or both, would constitute an Event of Default under this Agreement.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, in each case as in effect from time to time. References to sections of ERISA also refer to any successor sections.

     “Event of Default” shall have the meaning assigned to such term in Section 11 of this Annex I.

     “Investment Company Act” means the United States Investment Company Act of 1940, as amended.

     “Lien” means any lien (statutory or other), security interest, assignment, mortgage, charge, pledge, hypothecation, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease involving substantially the same economic effect as any of the foregoing and the filing of any financing statement under the UCC or any comparable law of any jurisdiction).

     “Monthly Additional Purchase Price Payment Date” means the second Business Day following the 25^th calendar day of each month prior to the Repurchase Date.

     “Monthly Additional Purchase Price Payment” means, for each Monthly Additional Purchase Price Payment Date, an amount equal to the excess of (A) all interest actually paid on the Purchased Securities (whether or not held by the Buyer), since the preceding Monthly Additional Purchase Price Payment Date (or, in the case of the first Monthly Additional Purchase Price Payment Date, the Purchase Date) over (B) $810,000.

Annex I-2

     “Person” means an individual, partnership, limited liability company, corporation (including a business trust), joint stock company, trust, incorporated or unincorporated association, joint venture, government or any agency or political subdivision thereof or any other entity.

     “Proposal” means a written notice setting forth the following information with respect to the portfolio of securities that the Seller desires to transfer to the Buyer: (i) the CUSIP for each such Security; and (ii) the unpaid principal balance for each such Security. A Proposal shall not include any Additional Purchased Securities.

     “SEC” means the Securities and Exchange Commission or any successor thereto.

     “Securities Act” means the Securities Act of 1933, as amended.

     “Securities Exchange Act” means the Securities Exchange Act of 1934, as amended.

     “UCC” means the Uniform Commercial Code as from time to time in effect in the applicable jurisdiction or jurisdictions.

               (b) The following capitalized terms shall have the respective meanings set forth below, in lieu of the meanings for such terms set forth in the Master Agreement:

     “Confirmation” means a confirmation substantially in the form of Exhibit A delivered pursuant to Paragraph 3 of the Master Agreement.

     “Purchase Date” means August 10, 2007.

     “Purchase Price” means $80,932,928.35

     “Repurchase Date” means August 9, 2008; provided, further, that, upon the declaration or deemed declaration of an Event of Default pursuant to Section 11 hereof, the Repurchase Date shall be accelerated pursuant to Section 11(b).

     “Repurchase Price” means an amount equal to the excess of (A) the sum of (i) the Purchase Price, (ii) $9,720,000, and (iii) $4,000,000, over (B) the excess of (i) all interest actually paid on the Purchased Securities (whether or not held by the Buyer), since the Purchase Date, over (ii) the sum of the Monthly Additional Purchase Price Payments paid by the Buyer to the Seller since the Purchase Date.

               (c) This Annex I is intended to supplement the Master Agreement and shall, wherever possible, be interpreted so as to be consistent with the Master Agreement; however, in the event of any conflict or inconsistency between the provisions of this Annex I and the provisions of the Master Agreement, the provisions of this Annex I shall govern and control. For purposes of this Annex I and each Confirmation, unless the context otherwise requires: (a) references to any amount as on deposit or outstanding on any particular date means such amount at the close of business on such day; (b) the term “including” means “including without limitation”; (c) references to any law or regulation refer to that law or regulation as amended from time to time and include any successor law or regulation; (d) references to any agreement

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refer to that agreement as from time to time amended, restated or supplemented or as the terms of such agreement are waived or modified in accordance with its terms; (e) references to any Person include that Person’s successors and assigns; and (f) headings are for purposes of reference only and shall not otherwise affect the meaning or interpretation of any provision hereof.

2. DELIVERY. All Purchased Securities shall be transferred to the Buyer by the Seller delivering (or causing to be delivered) to the Buyer, on or prior to the Purchase Date, the security certificate for each Purchased Security, indorsed to the Buyer by an effective indorsement whereupon ownership of the Purchased Securities shall pass to the Buyer.

3. FUNDING REQUESTS; CONFIRMATIONS.

     Paragraph 3 of the Master Agreement is hereby deleted in its entirety and replaced with the following:

     (a) The Seller agrees to do such further acts and things and to execute and deliver to Buyer such additional assignments, acknowledgments, agreements, powers and instruments as are reasonably required by Buyer to carry into effect the purposes of this Agreement, to perfect the interests of Buyer in the Purchased Securities, or to better assure and confirm unto Buyer its rights, powers and remedies hereunder.

     (b) On or prior to 7:00 a.m. New York City time on the date hereof, the Seller shall deliver to the Buyer the Proposal.

     (c) On the Purchase Date specified in the Proposal, the Seller and Buyer shall agree, in writing through the execution of the Confirmation, on the Securities to be purchased by the Buyer, which shall be identified by CUSIP in the Confirmation. Seller shall, as soon as practicable (but no later than 11:00 a.m. New York City time on the Purchase Date), deliver to the Buyer the Confirmation, substantially in the form of Exhibit A, and if such Confirmation has been delivered in form acceptable to the Buyer and all other conditions precedent set forth in Section 12 have been satisfied to the Buyer’s satisfaction, the Buyer shall execute and return such Confirmation to the Seller.

     (d) In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail. For the avoidance of doubt, the parties hereby agree that there shall be only one Confirmation and only one Transaction under this Agreement.

4. MARGIN MAINTENANCE.

     Paragraph 4 of the Agreement is hereby deleted in its entirety.

5. INCOME PAYMENTS; ADDITIONAL PURCHASE PRICE.

     Paragraph 5 of the Master Agreement is hereby deleted in its entirety and replaced with the following:

     The Buyer shall be entitled to all Income and other proceeds received on the Purchased Securities. On each Monthly Additional Purchase Price Payment Date, the Buyer shall pay to

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the Seller the Monthly Additional Purchase Price Payment for such Monthly Additional Purchase Price Payment Date by 11:30 a.m. New York City time, unless an Event of Default or Default shall have occurred or be continuing.

6. SECURITY INTEREST.

     Paragraph 6 of the Master Agreement is hereby deleted in its entirety and replaced with the following:

Although the parties intend that the Transaction hereunder be a sale and purchase and not a loan, in the event the Transaction is deemed to be a loan, the Seller shall be deemed to have pledged to the Buyer as security for the performance by the Seller of its obligations under the Transaction, and shall be deemed to have granted to the Buyer a security interest in, all of the Purchased Securities and all Income thereon and other proceeds thereof. The Seller hereby authorizes the Buyer to file such financing statements relating to the Purchased Securities as it may deem appropriate in its sole discretion. The Seller shall pay the filing costs for any financing statements prepared pursuant hereto.

7. PURCHASE PRICE; REPURCHASE PRICE.

     Paragraph 7 of the Master Agreement is hereby deleted in its entirety and replaced with the following:

     (a) On the Purchase Date for the Transaction, the Buyer shall pay the Seller the Purchase Price to or at the direction of the Seller.

     (b) The Seller shall pay the Repurchase Price on the Repurchase Date in immediately available funds by 11:30 a.m. New York City time on the Repurchase Date to the Buyer.

     (c) The Seller may elect to repay all or any portion of the Repurchase Price on the Repurchase Date to the Buyer in kind and not in immediately available funds by delivering to the Buyer written notice of such election at least two Business days preceding the Repurchase Date. If the Seller makes such an election, the Buyer shall provide to Seller a schedule of each of the Purchased Securities or substantially similar securities and the market value (determined by Buyer in its sole discretion) with respect thereto; and Seller shall be entitled to select, by written notice to Buyer, the amount of Repurchase Price it wishes to settle in kind and which Purchased Securities or substantially similar securities to use for that purpose.

8. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SELLER.

          In addition to the representations and warranties appearing in Paragraph 10 of the Master Agreement, the Seller represents and warrants to the Buyer that as of the date of this Agreement and as of the Purchase Date for the purchase of the Purchased Securities by Buyer from the Seller hereunder:

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     (a) It (i) is duly organized, validly existing and in good standing under the laws of the state of its formation, and (ii) has all requisite power and authority to carry on its business as now conducted in all material respects and to perform its obligations under this Agreement.

     (b) Its execution, delivery and performance of this Agreement (i) are within its organic powers, (ii) have been duly authorized by all necessary corporate action, and (iii) do not contravene (A) its organizational documents or (B) any law or any contractual restriction binding on the Seller, except with respect to the contravention of law or contractual restrictions which would not result in any material adverse change in the business, operations, financial condition, properties, or assets of the Seller, or which may have an adverse effect on the validity of this Agreement or the Purchased Securities or the Seller’s ability to timely perform its obligations under this Agreement.

     (c) No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body, domestic or foreign (which has not been obtained or made) is or will be necessary for the Seller’s valid execution, delivery and performance of this Agreement.

     (d) This Agreement when executed, will constitute legal, valid and binding obligations of the Seller enforceable against the Seller in accordance with their respective terms; except that the enforcement of each such agreement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally and (ii) general principles of equity and the discretion of the court before which any proceeding therefor may be brought.

     (e) There is no action, suit, proceeding, investigation, or arbitration pending or threatened against the Seller or any of its assets, which may result in any material adverse change in the business, operations, financial condition, properties, or which may have an adverse effect on the validity of this Agreement or the Purchased Securities or the Seller’s ability to timely perform its obligations under this Agreement or requires filing with the SEC in accordance with its rules and regulations. This Seller is in compliance in all material respects with all requirements of applicable law. The Seller is not in default in any material respect with respect to any judgment, order, writ, injunction, decree, rule or regulation of any arbitrator or governmental authority.

     (f) The Seller has not dealt with any broker, investment banker, agent, or other Person who may be entitled to any commission or compensation in connection with the sale of Purchased Securities pursuant to this Agreement.

     (g) No Event of Default or Default exists hereunder.

     (h) The Seller is generally able to pay, and as of the date hereof is paying, its debts as they come due. The Seller has not become, or is presently, financially insolvent nor will the Seller be made insolvent by virtue of its execution of or performance under this Agreement within the meaning of the bankruptcy laws or the insolvency laws of any jurisdiction. The Seller has not entered into this Agreement or the Transaction pursuant thereto in contemplation of insolvency or with intent to hinder, delay or defraud any creditor.

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     (i) The Seller is not (A) an “investment company,” or a company “controlled by an investment company,” within the meaning of the Investment Company Act of 1940, as amended, or (B) a “holding company,” or a “subsidiary company of a holding company,” or an “affiliate” of either a “holding company” or a “subsidiary company of a holding company,” as such terms are defined in the Public Utility Holding Company Act of 1935, as amended.

     (j) The Seller has filed or caused to be filed all tax returns which to its knowledge would be delinquent if they had not been filed on or before the date hereof and has paid all taxes shown to be due and payable on or before the date hereof on such returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it and any of its assets by any governmental authority, except for such taxes as are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided in accordance with generally accepted accounting principles; no tax liens have been filed against any of the Seller’s assets and, to its knowledge, no claims are being asserted with respect to any such taxes, fees or other charges.

     (k) The Seller does not sponsor, contribute to, or maintain a “single employer plan” within the meaning of Section 4001(a)(15) of ERISA, and is not a member of an ERISA Group, any member of which sponsors, contributes to, or maintains a “single employer plan.”

     (l) The Seller represents and warrants (i) that the Transaction contemplated hereunder is a “repurchase agreement” as that term is defined in Section 101(47) of the Bankruptcy Code, eligible for relief under Section 559 of the Bankruptcy Code (except insofar as the Purchased Securities subject to the Transaction, or the term of the Transaction, would render such definition inapplicable), a “forward contract” as that term is defined in Section 101(25) of the Bankruptcy Code (except insofar as the Purchased Securities subject to the Transaction would render such definition inapplicable), a “securities contract” as that term is defined in Section 741(7) of the Bankruptcy Code, and/or a “master netting agreement” as that term is defined in Section 101(38A) of the Bankruptcy Code; and (ii) that each assignment, transfer or payment of Purchased Securities or Repurchase Price is a “margin payment” as that term is defined in Sections 101(38), 741(5) and 761(15) of the Bankruptcy Code, or a “settlement payment” as that term is defined in Sections 101(51A) and 741(8) of the Bankruptcy Code.

     (m) The provisions of this Agreement are effective to either constitute a sale of the Purchased Securities transferred by the Seller to the Buyer or to create in favor of the Buyer a valid security interest in all right, title and interest of the Seller in, to and under such Purchased Securities.

     (n) The Seller’s jurisdiction of organization is Maryland and its chief executive office is, and has been, located at 200 Metroplex, Suite 100, Edison, New Jersey 08817.

     (o) As of the date hereof, the Seller has not changed its jurisdiction of formation since such entity was formed.

     (p) The Seller keeps its books and records, including all computer tapes and records related to the Purchased Securities transferred by it hereunder at its chief executive office and its offices at 1 Exchange Plaza, 55 Broadway, Ste 3002, New York, New York 10006.

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     (q) The Seller does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement in all material respects.

     (r) The Seller has not selected and will not select the Purchased Securities transferred by it hereunder in a manner so as to adversely affect the Buyer’s interests.

     (s) There is no UCC filing jurisdiction for filing of a financing statement in order to establish perfection with respect the Seller’s interest in the Purchased Securities other than Maryland.

     (t) The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Seller to the Buyer in connection with the negotiation, preparation or delivery of this Agreement or included herein or delivered pursuant hereto, when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by or on behalf of the Seller to the Buyer in connection with this Agreement and the transactions contemplated hereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified.

     (u) The use of all funds acquired by the Seller under this Agreement will not conflict with or contravene any of Regulations T, U or X promulgated by the Board of Governors of the Federal Reserve System.

     (v) As of the date hereof, the exact legal name of the Seller is, and since the Seller was formed has been, the name set forth for it on the signature page hereto and the Seller has not had (i) any prior name or (ii) any trade names.

     (w) The consideration received by the Seller in connection with the transfer of the Purchased Securities by the Seller under this Agreement constitutes fair consideration and reasonably equivalent value for such Purchased Securities.

     (x) The consummation of the transactions contemplated by this Agreement are in the ordinary course of business of the Seller.

9. NEGATIVE COVENANTS OF THE SELLER.

          The Seller shall not without the prior written consent of Buyer:

     (a) take any action which would directly or indirectly impair or adversely affect Buyer’s title to the Purchased Securities;

     (b) move its chief executive office from the address or change its jurisdiction of organization from the jurisdiction referred to in Section 8(p) of this Annex I unless it shall have provided the Buyer 30 days’ prior written notice of such change;

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     (c) engage in any conduct or activity that could subject its assets to forfeiture or seizure;

     (d) make any material change in the nature of its business as carried on at the date hereof;

     (e) create, incur, assume or suffer to exist Liens of any nature whatsoever on any of the Purchased Securities, whether real, personal or mixed, now or hereafter owned, other than the Liens created in connection with the transactions contemplated by this Agreement; nor shall such Seller cause any of the Purchased Securities to be sold, pledged, assigned or transferred; or

     (f) transfer, assign, convey, grant, bargain, sell, set over, deliver or otherwise dispose of, or pledge or hypothecate, directly or indirectly, any interest in the Purchased Securities (or any of them) to any Person other than Buyer, or engage in repurchase transactions or similar transactions with respect to the Purchased Securities (or any of them) with any Person other than Buyer so long as such Purchased Securities are subject to the Agreement.

10. AFFIRMATIVE COVENANTS OF THE SELLER.

     (a) The Seller shall promptly notify Buyer of any material adverse change in its business operations and/or financial condition; provided, however, that nothing in this Section 10 shall relieve the Seller of its obligations under the Agreement.

     (b) The Seller (1) shall defend the right, title and interest of Buyer in and to the Purchased Securities against, and take such other action as is necessary to remove, the Liens, security interests, claims and demands of all Persons (other than security interests by or through Buyer) and (2) shall take all action reasonably requested by the Buyer to ensure that Buyer will have a first priority security interest in the Purchased Securities subject to the Transaction in the event the Transaction is recharacterized as a secured financing.

     (c) The Seller will permit Buyer, or any designated representative thereof, to inspect such Seller’s records with respect to the Purchased Securities and the conduct and operation of its business related thereto upon reasonable prior written notice from Buyer, or any designated representative thereof, at such reasonable times and with reasonable frequency, and to make copies of extracts of any and all thereof.

     (d) If the Seller shall at any time become entitled to receive or shall receive any rights, whether in addition to, in substitution of, as a conversion of, or in exchange for the Purchased Securities, or otherwise in respect thereof, the Seller shall accept the same as Buyer’s agent, hold the same in trust for Buyer and deliver the same forthwith to Buyer in the exact form received, duly endorsed by the Seller to Buyer, if required, together with an undated bond or other securities power covering such certificate duly executed in blank to be held by Buyer hereunder as additional collateral security for the Transaction. If any sums of money or property so paid or distributed in respect of the Purchased Securities shall be received by the Seller, the Seller shall promptly deliver such amounts to the Buyer.

     (e) At any time from time to time upon prior written request of Buyer, at the sole expense of the Seller, the Seller will promptly and duly execute and deliver such further

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instruments and documents and take such further actions as Buyer may reasonably request for the purposes of obtaining or preserving the full benefits of this Agreement including the first priority security interest granted hereunder and of the rights and powers herein granted (including, among other things, filing such UCC financing statements as Buyer may reasonably request). If any amount payable under or in connection with any of the Purchased Securities shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be promptly delivered to Buyer, duly endorsed in a manner satisfactory to Buyer, to be held as a Purchased Security under the Transaction pursuant to this Agreement, and the documents delivered in connection herewith.

     (f) If any amounts are required to be withheld for U.S. federal income tax purposes with respect to any payments to Buyer in connection with the Transaction effected by this Agreement, Seller shall so withhold (if so required) and shall make payments to Buyer so that the net amount received by Buyer after such withholding equals the amount Buyer would have received if such withholding were not required. The Buyer will deliver such form or forms as the Seller reasonably requests to minimize or avoid any such withholding.

     (g) The Seller shall provide Buyer with the following financial and reporting information:

     (i) Within 45 days after the last day of the first three fiscal quarters in any fiscal year, an unaudited statement of the Seller’s income and expenses for such quarter and assets and liabilities as of the end of such quarter; and

     (ii) Within 90 days after the last day of its fiscal year, an audited statement of the Seller’s income and expenses for such year and assets and liabilities as of the end of such year.

     (h) The Seller shall timely file all tax returns that are required to be filed by them and shall timely pay all taxes due, except for any such taxes as are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided.

     (i) The Seller shall give notice to the Buyer immediately after a responsible officer of the Seller has any knowledge of the occurrence of any Event of Default or Default.

     (j) All information, reports, exhibits, schedules, financial statements or certificates of the Seller or any of its officers furnished to the Buyer hereunder and during the Buyer’s diligence of the Seller is and will be true and complete and not fail to disclose any material facts or omit to state any material fact necessary to make the statements therein or therein, in light of the circumstances in which they are made, not misleading. All required financial statements delivered by the Seller to the Buyer pursuant to this Agreement shall be prepared in accordance with GAAP, or as applicable, in the case of SEC filings, the appropriate SEC accounting requirements.

     (k) If an Event of Default has been declared or deemed declared, the Seller shall cooperate reasonably with the Buyer.

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11. EVENTS OF DEFAULT; INDEMNITY.

Paragraph 11 of the Master Agreement is hereby deleted in its entirety and replaced with the following:

     (a) After the occurrence and during the continuance of an Event of Default hereunder, the Seller hereby appoints the Buyer as its attorney-in-fact for the purpose of carrying out the provisions of this Agreement and taking any action and executing or endorsing any instruments that Buyer may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Each of the following shall constitute an “Event of Default” hereunder:

     (i) the Seller fails to transfer the Purchased Securities to Buyer upon payment of the Purchase Price on the Purchase Date;

     (ii) the Seller fails to repurchase the Purchased Securities or substantially similar securities held by the Buyer on the Repurchase Date by paying the Repurchase Price and such failure continues unremedied for two consecutive Business Days;

     (iii) an Act of Insolvency occurs with respect to the Seller or any Affiliate thereof;

     (iv) the Seller shall have defaulted in any of its obligations under the Stock Purchase Agreement;

     (v) any representation made by the Seller (other than any representations regarding the eligibility of the Purchased Securities set forth in Section 19 of this Annex I), shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated and shall not have been cured within 5 days of the date the Seller has actual knowledge or has received written notice of such breach;

     (vi) the Seller shall admit its inability to, or its intention not to, perform any of its obligations hereunder;

     (vii) the Seller shall have assigned or purported to assign this Agreement, or any of its rights hereunder, except to an Affiliate, without obtaining the prior written consent of Buyer; or

     (viii) the Seller fails to comply with any of its other agreements or covenants in, or provisions of, this Agreement and such failure continues for a period of 5 days after the earlier of (i) the date on which the Seller obtains knowledge thereof or (ii) the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Seller by Buyer.

     (b) Provided an Event of Default has occurred and is continuing, the Buyer may, at its option (which option shall be deemed to have been exercised immediately upon the occurrence of an event described in clause (iii) of Section 11(a)), declare an Event of Default to have

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occurred hereunder and, upon the exercise or deemed exercise of such option, the Transaction shall terminate, meaning that the Repurchase Date hereunder shall, if it has not already occurred, be deemed immediately to occur. The Buyer shall (except upon the occurrence of any event deemed to have been declared an Event of Default pursuant to the preceding sentence) give notice to the Seller of the exercise of such option as promptly as practicable.

     (c) If the Buyer exercises or is deemed to have exercised the option referred to in clause (b) of this Section, (i) the Seller’s obligation to repurchase all Purchased Securities or substantially similar securities held by Buyer, at the Repurchase Price, shall thereupon become immediately due and payable, and (ii) all Income paid after such exercise or deemed exercise shall be retained by Buyer applied to the unpaid Repurchase Price and any other amounts owing by the Seller hereunder.

     (d) If the Buyer exercises or is deemed to have exercised the option referred to in clause (b) of this Section, the Seller hereby acknowledges and agrees that the Purchased Securities or substantially similar securities (A) may be sold by the Buyer, or (B) in Buyer’s sole discretion, in lieu of selling all or a portion of the Purchased Securities or substantially similar securities, may give the Seller credit for such Purchased Securities or substantially similar securities in an amount equal to the price therefor obtained from a generally recognized source or the most recent closing bid quotation from such a source.

     (e) The parties acknowledge and agree that (1) the Purchased Securities are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, Buyer may establish the source therefor in its sole discretion, (3) all prices, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities), and (4) any sale of the Securities by the Buyer shall be deemed to have been conducted in a commercially reasonable manner for all purposes under applicable law.

     (f) Buyer shall pay to the Seller an amount equal to the excess of the aggregate purchase price paid by the purchasers in any sale of the Purchased Securities or substantially similar securities (or an amount equal to the excess of such credit as determined in Section 11(d)(B) above) following the declaration or deemed declaration of an Event of Default, as reduced by any expenses incurred by Buyer in connection with such sale or liquidation, over the aggregate Repurchase Price hereunder and any other amounts payable by the Seller hereunder.

     (g) To the extent permitted by applicable law, the Seller shall be liable to Buyer for interest on any amounts owing by the Seller hereunder, from the date the Seller becomes liable for such amounts hereunder until such amounts are (i) paid in full by the Seller or (ii) satisfied in full by the exercise of the rights hereunder. Interest on any sum payable by the Seller to Buyer under this Section 11 shall be at a rate equal to 14% per annum.

     (h) Subject to the notice and grace periods set forth herein, each party to this Agreement may exercise any or all of the remedies available to such party immediately upon the declaration or deemed declaration of an Event of Default and at any time during the continuance thereof. Neither any failure nor any delay on the part of any party to this Agreement in insisting upon strict performance of any term, condition, covenant or agreement, or exercising any right,

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power, remedy or privilege hereunder shall operate as or constitute a waiver thereof, nor shall a single or partial exercise thereof preclude any other future exercise, or the exercise of any other right, power, remedy or privilege.

     (i) Buyer may enforce its rights and remedies hereunder without prior judicial process or hearing, and the Seller hereby expressly waives any defenses the Seller might otherwise have to require Buyer to enforce its rights by judicial process. Seller also waives any defense the Seller might otherwise have arising from the use of nonjudicial process, disposition of any or all of the Purchased Securities or substantially similar securities, or from any other election of remedies. The Seller recognizes that nonjudicial remedies are consistent with the usages of the trade, are responsive to commercial necessity and are the result of a bargain at arm’s length.

     (j) The Seller hereby agree to indemnify Buyer and its Affiliates and each of their officers, directors, employees and agents (each, an “Indemnified Party”) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, taxes (including stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Purchased Securities or in connection with this Agreement or any of the transactions contemplated by this Agreement and the documents delivered in connection herewith), fees, costs, expenses (including reasonable attorneys fees and disbursements actually incurred to external counsel) or disbursements (all of the foregoing, collectively “Indemnified Amounts”) which may at any time (including, without limitation, such time as this Agreement shall no longer be in effect and the Transaction shall have been repaid in full) be imposed on or asserted against any Indemnified Party in any way whatsoever arising out of or in connection with, or relating to, this Agreement or the Transaction hereunder or any action taken or omitted to be taken by any Indemnified Party under or in connection with any of the foregoing, including without limitation in connection with the enforcement of this Agreement or any other agreement evidencing the Transaction, whether in action, suit or litigation or bankruptcy, insolvency or other similar proceeding affecting creditors’ rights generally; provided, that the Seller shall not be liable for Indemnified Amounts resulting from the gross negligence or willful misconduct of any Indemnified Party.

     (k) Notwithstanding anything herein to the contrary, any payment made by the Seller, within the applicable grace period described above, to cure any failure by the Seller to repurchase the Purchased Securities or substantially similar securities held by Buyer on the Repurchase Date, shall be made by it on or before 2:00 p.m. (New York time) on the date such failure is so cured. Any such payment received by or on behalf of the Buyer after 2:00 p.m. (New York time) shall be deemed to be received on (the next succeeding Business Day.

12. CONDITIONS PRECEDENT.

     The Buyer’s agreement to enter into the initial Transaction under the Agreement is subject to the prior or contemporaneous satisfaction of all of the following conditions precedent (the first date on which all such conditions precedent shall have been satisfied, the “Effective Date”):

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     (a) Agreements. The Buyer shall have received the Agreement, duly executed and delivered by each of the parties hereto. In addition, the Seller and the Buyer shall have received the Stock Purchase Agreement, dated as of the date hereof (the “Stock Purchase Agreement”), duly executed and delivered by the Seller and the Buyer. The Buyer shall have received one or more cross receipts, satisfactory to the Buyer in its sole discretion and duly executed and delivered by the applicable repo lender(s) for the Seller, to the effect that upon its receipt of the payment of certain amounts by the Buyer, such repo lender(s) shall deliver the Purchased Securities in its possession to the Buyer or the Buyer shall have previously received the Purchased Securities held by any repo lender which has not provided such a cross receipt.

     (b) Seller’s Certificate. The Buyer shall have received a certificate from the secretary of the Seller, in form and substance satisfactory to the Buyer, attaching a good standing certificate and certified copies of the Seller’s charter and by-laws (or equivalent documents) and of all corporate or other authority of the Seller with respect to the execution, delivery and performance of the Agreement and each other document to be delivered by it from time to time in connection herewith and certifying as to the incumbency of each person authorized to execute on behalf of the Seller the Agreement or any related document on behalf (and the Buyer may conclusively rely on such certificate until it receives notice in writing from the Seller to the contrary).

     (c) Opinions of Counsel. The Buyer shall have received opinions of legal counsel to the Seller with respect to the Agreement and the matters contemplated hereunder, including, without limitation, a customary due authority opinion, which opinions shall be satisfactory to the Buyer in form and substance.

     (d) Other Documents. The Buyer shall have received such other documents as the Buyer, or its counsel, may reasonably request.

     (e) Representations and Warranties. Both immediately before and after giving effect to such Transaction, all of the representations and warranties made by the Seller pursuant to the Agreement shall be true, correct and complete in all material respects on and as of the Purchase Date for such Transaction with the same force and effect as if made on and as of such date (or, if any representation or warranty is expressly stated to have been made as of a specific date, or with respect to a specific period, as of such specific date or period).

     (f) Fees and Expenses. The Buyer shall have received payment from Seller of an amount equal to the actual costs and expenses incurred by the Buyer in connection with the development, preparation and execution of the Agreement, and any other documents prepared in connection herewith, including, without limitation, the fees and expenses of Mayer, Brown, Rowe & Maw LLP, counsel to the Buyer, provided that a statement of such fees shall have been delivered prior to 11:00 A.M. New York City time on the date hereof.

13. USE OF EMPLOYEE PLAN ASSETS.

Paragraph 18 of the Master Agreement is hereby deleted in its entirety and replaced with the following:

Annex I-14

     Both the Buyer and the Seller represent, warrant and covenant to the other with respect to the Transaction that it is not, and is not acting on behalf of, (i) an “employee benefit plan” as defined in Section 3(3) of ERISA, whether or not subject to Title I of ERISA, (ii) a “plan” as defined in Section 4975 of the Code, or (iii) an entity deemed to hold plan assets of any of the foregoing.

14. BUYER AS ATTORNEYS-IN-FACT. The Buyer is hereby appointed to act after the declaration or deemed declaration of a Default or Event of Default as the attorney-in-fact of the Seller for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instruments that Buyer may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Buyer shall have the right and power after the declaration or deemed declaration of any Default or Event of Default to receive, endorse and collect all checks made payable to the order of the Seller representing any payment on account of the principal of or interest on any of the Purchased Securities and to give full discharge for the same.

15. REPURCHASE TRANSACTIONS. Buyer may engage in repurchase transactions with the Purchased Securities or otherwise pledge, transfer, hypothecate or rehypothecate the Purchased Securities, but no such transaction shall relieve the Buyer of its obligations to resell and transfer securities that, in the reasonable discretion of the Buyer, are substantially the same as the Purchased Securities (based on weighted average coupon, weighted average life, weighted average FICO of the underlying mortgagors, weighted average loan to value of the underlying mortgage loans, occupancy status and documentation type) to the Seller pursuant to the terms hereof.

16. NOTICES AND OTHER COMMUNICATIONS.

     Paragraph 13 of the Master Agreement is hereby deleted and replaced in its entirety with the following:

     Except as otherwise expressly provided herein, all notices or communications shall be in writing (including, without limitation, by e-mail, facsimile or telex communication) or confirmed in writing and such notices and other communications shall, when mailed, e-mailed, communicated by facsimile transmission or telexed, be effective when received at the address for notices for the party to whom such notice or communications is to be given as set forth in Annex II hereto.

     Notwithstanding the foregoing, a facsimile transmission shall be deemed to be received when transmitted so long as the transmitting machine has provided an electronic confirmation of such transmission. Any notices or communications sent via e-mail shall be followed with a telephone call on the same day to confirm receipt of such e-mail. Either party may revise any information relating to it by notice in writing to the other party, which notice shall be effective on the third Business Day following receipt thereof.

17. EXPENSES. The Seller shall pay its own expenses and all reasonable out-of-pocket costs and expenses (including reasonable fees and disbursements of counsel) of Buyer incident to

Annex I-15

the enforcement of payment of amounts due under the Agreement, whether by judicial proceedings or otherwise, including, without limitation, in connection with bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceedings involving the Seller. Notwithstanding any provision hereof to the contrary, the obligations of the Seller under this Section 17 shall be effective and enforceable whether or not the Transaction remains outstanding and shall survive payment of all other obligations owed by the Seller to Buyer.

18. COUNTERPARTS. The Agreement may be executed in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument.

19. REPRESENTATIONS RELATING TO THE PURCHASED SECURITIES. The Seller hereby represents and warrants, with respect to each Purchased Security, as follows:

     (a) Upon payment of the Purchase Price as directed by Seller pursuant hereto, such Purchased Securities are free and clear of any lien, encumbrance or impediment to transfer (including any “adverse claim” as defined in Section 8-102(a)(1) of the UCC), and Seller is the recordholder and beneficial owner of and has good and marketable title to and the right to sell and transfer such Purchased Securities to Buyer and, upon transfer of such Purchased Securities to Buyer, Buyer shall be the owner of such Purchased Securities free of any adverse claim. In the event the Transaction is recharacterized as a secured financing of the Purchased Securities, the provisions of the Agreement are effective to create in favor of Buyer a valid security interest in all rights, title and interest of Seller in, to and under the Purchased Securities and Buyer shall have a valid, perfected first priority security interest in the Purchased Securities;

     (b) information set forth in the Confirmation is true and correct in all material respects;

     (c) no payment under such Security is currently past its contractual due date or has been past its contractual due date since its issuance date;

     (d) the Seller has received all consents and approvals required by the terms of such Security to the transfer to Buyer of its interest and rights in such Security; and

     (e) Buyer’s purchase of such Security shall not constitute a violation of any restriction on transfer applicable to such Security pursuant to its terms, or a breach of Section 5 of the Securities Act.

20. AMENDMENT/WAIVERS.

     (a) Amendments. Any amendment, modification or supplement to this Annex I or the Agreement shall be in writing signed by the parties hereto.

     (b) Waiver. Any waiver of any provision of this Agreement, and any consent to any departure by the Buyer from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand upon the Buyer in any instance hereunder shall entitle the Buyer to any other or further notice or demand in similar or other circumstance.

Annex I-16

     (c) Costs and Expenses. The costs and expenses associated with any amendment, modification or supplement pursuant to this Section 20 shall be borne by the party requesting such amendment, modification or supplement.

21. TAX TREATMENT. Each Party intends that the Transaction effected by this Agreement be treated as a sale of the Purchased Securities for U.S. federal income tax purposes, and the Parties hereby agree to file all tax returns and otherwise treat the transaction for U.S. federal income tax purposes consistently therewith. All provisions of the Agreement shall be construed to achieve the aforementioned treatment for U.S. federal, state, and local income and franchise tax purposes. None of the parties to this Agreement shall take any contrary position unless required by applicable law.

22. SUBMISSION TO JURISDICTION AND WAIVER OF IMMUNITY.

     (a) Each Party irrevocably and unconditionally (i) submits to the non-exclusive jurisdiction of any United States federal or New York state court sitting in Manhattan, and any appellate court from any such court, solely for the purpose of any suit, action or proceeding brought to enforce its obligations under this Agreement or relating in any way to this Agreement or the Transaction under this Agreement and (ii) waives, to the fullest extent it may effectively do so, any defense of an inconvenient forum to the maintenance of such action or proceeding in any such court and any right of jurisdiction on account of its place of residence or domicile.

     (b) To the extent that either party has or hereafter may acquire any immunity (sovereign or otherwise) from any legal action, suit or proceeding, from jurisdiction of any court or from set off or any legal process (whether service or notice, attachment prior to judgment, attachment in aid of execution or judgment, execution of judgment or otherwise) with respect to itself or any of its property, such party hereby irrevocably waives and agrees not to plead or claim such immunity in respect of any action brought to enforce its obligations under the Agreement or relating in any way to this Agreement or the Transaction under this Agreement.

23. CHARACTERIZATION OF THIS AGREEMENT. Each of the Seller and the Buyer hereby acknowledges and agrees:

     (a) that the Transaction is a “repurchase agreement” as that term is defined in Section 101(47) of Title 11 of the Bankruptcy Code (except insofar as the Purchased Securities subject to such Transaction, or the term of such Transaction, would render such definition inapplicable), a “forward contract” as that term is defined in Section 101(25) of the Bankruptcy Code (except insofar as the Purchased Securities subject to such Transaction would render such definition inapplicable), a “securities contract” as that term is defined in Section 741(7) of the Bankruptcy Code, and/or a “master netting agreement” as that term is defined in Section 101(38A) of the Bankruptcy Code; and

     (b) that each assignment, transfer or payment of Purchased Securities or Repurchase Price is a “margin payment” as that term is defined in Sections 101(38), 741(5) and 761(15) of the Bankruptcy Code, or a “settlement payment” as that term is defined in Sections 101(51A) and 741(8) of the Bankruptcy Code.

Annex I-17

     Seller and Buyer further intend that Buyer’s right to liquidate, terminate or accelerate the Purchased Securities delivered to Buyer in connection with the Transaction hereunder, and to exercise any other remedies pursuant to Section 11 hereof, are contractual rights to liquidate, terminate or accelerate such Transaction as described in Sections 555, 556, 559 and 561 of the Bankruptcy Code.

     Each of the Buyer and the Seller hereby covenants and agrees that it shall not challenge such characterizations of this Agreement, the Transaction hereunder or of any of the payments or actions referred to above.

24. NO RECOURSE. Except with respect to any indemnification rights the Buyer may have against the Seller, no recourse shall be had against the Seller with respect to any of the payment obligations, covenants, agreements, representations or warranties of the Seller contained in this Agreement, and the Buyer’s recourse shall be limited to its rights in the Purchased Securities.

25. BINDING TERMS. All of the covenants, stipulations, promises and agreements in the Agreement shall bind the successors and assigns of the parties hereto, whether expressed or not.

26. TERMINATION.

          Paragraph 15(a) of the Master Agreement is hereby deleted in its entirety and replaced with the following:

          The rights and obligations of the parties under this Agreement and under the Transaction shall not be assigned by either party other than to one of its Affiliates without the prior written consent of the other party, and any such assignment without the prior written consent of the other party shall be null and void. The Seller shall maintain a register of the ownership of the Buyer’s rights hereunder, and in the event of any assignment of this agreement by the Buyer, the Buyer shall present a copy of such assignment to the Seller, and the Seller shall record the name(s) and address(es) of the assignee(s) in the register. The parties shall be entitled to rely upon the register as proof of the ownership of the Buyer’s rights hereunder. Subject to the foregoing, this Agreement and the Transaction shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

Annex I-18

     IN WITNESS WHEREOF, Buyer and the Seller have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the day and year first above written.

RCG PB, LTD, as Buyer
By:	/s/ Jeffrey M. Solomon
Name:	Jeffrey M. Solomon
Title:	Authorized Signatory
HANOVER CAPITAL MORTGAGE HOLDINGS, INC., as Seller
By:	/s/ John A. Burchett
Name:	John A. Burchett
Title:	Chairman, President and CEO

Second Amended and Restated Annex I to
Master Repurchase Agreement

S-1

EXHIBIT A

FORM OF CONFIRMATION

TO:	Hanover Capital Mortgage Holdings, Inc.
	200 Metroplex Drive
	Edison, NJ 08817
	Attention: Harold McElraft
	Tel: 732-593-1044
	Fax: 732-548-0286
and
	Hanover Capital Mortgage Holdings, Inc.
	1 Exchange Plaza/55 Broadway
	Suite 3002
	New York, NY 1006 Attention: James Strickler
	Tel: 212-227-0075 ext 5003
	Fax: 212-227-5434
FROM:	RCG PB, Ltd
	c/o Ramius Advisors, LLC
	666 Third Avenue, 26th Floor
	New York, New York 10017
	Attention: Julian Vulliez / John Holmes / Owen Littman
	Tel.: 212-845-7941 / 212-201-4851 / 212-201-4841
	Fax: 212-845-7960 / 212-845-7999 / 212-845-7995
	RE:

RCG PB, Ltd (the “Buyer”) is pleased to confirm your sale and our purchase of the Purchased Securities described below pursuant to the Master Repurchase Agreement (including the supplemental terms set forth in the Second Amended and Restated Annex I thereto dated as of November 13, 2007), dated as of August 10, 2007 (the “Agreement”).

DESCRIPTION OF PURCHASED SECURITIES:

CUSIP Unpaid Principal Balance

Exh. A-1

The Agreement is incorporated by reference into this Confirmation and made a part hereof as if it were fully set forth herein. All capitalized terms used herein but not otherwise defined shall have the meanings specified in the Agreement.

BY: RCG PB, LTD

By:

Name:

Title:

ANNEX II
Names and Addresses for Communications Between Parties

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
200 Metroplex Drive
Edison, NJ 08817
Attention: Suzette Berrios
Tel: 732-593-1038
Fax: 732-548-0286

RCG PG, LTD
c/o Ramius Advisors, LLC
666 Third Avenue, 26th Floor
New York, New York 10017
Attention: Julian Vulliez / John Holmes / Owen Littman
Tel.: 212-845-7941 / 212-201-4851 / 212-201-4841
Fax: 212-845-7960 / 212-845-7999 / 212-845-7995

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. (the “Registrant”) for the period ended September 30, 2007 (the “Report”);

     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: November 19, 2007

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. (the “Registrant”) for the period ended September 30, 2007 (the “Report”);

     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: November 19, 2007

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 September 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m), as amended; 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: November 19, 2007	By:	/s/ JOHN A. BURCHETT
		John A. Burchett
		President and Chief Executive Officer
Date: November 19, 2007	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.