8-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): November 20, 2007

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

(Exact name of Registrant as Specified in its Charter)

Maryland	001-13417	13-3950486
(State or Other Jurisdiction	(Commission	(IRS Employer
of Incorporation)	File Number)	Identification No.)

200 Metroplex Drive, Suite 100, Edison, New Jersey 08817

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code (732) 548-0101

N/A

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

 EX-99.1 Press Release, dated November 20, 2007

 EX-99.2 Transcript of November 20, 2007 Earnings Call

 

SECTION 2 — FINANCIAL INFORMATION

ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

On November 20, 2007, the Company issued a press release announcing its financial results for the three and nine months ended September 30, 2007. A copy of the release is furnished as Exhibit 99.1 to this Current Report on Form 8-K.

The information furnished in this section of this Current Report on Form 8-K and in Exhibit 99.1 attached hereto, with respect to the Company’s results of operations only, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

ITEM 8.01. OTHER EVENTS

At 11:00 AM ET on Tuesday, November 20, 2007, the Company held an investor conference call that was also broadcast live on the internet at www.investorcalendar.com. A copy of the transcript of the recorded live call is attached hereto as Exhibit 99.2.

SECTION 9 — FINANCIAL STATEMENTS AND EXHIBITS

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.

     (c) Exhibits.

99.1	Press Release, dated November 20, 2007.
99.2	Transcript of November 20, 2007 Earnings Call.

[signature on following page]

 

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SIGNATURE

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

	HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
Date: November 27, 2007	By:	/s/ Harold F. McElraft
		Harold F. McElraft, Chief Financial Officer and Treasurer

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INDEX TO EXHIBITS

EXHIBIT NO.	DESCRIPTION
Exhibit 99.1	Press Release, dated November 20, 2007.
Exhibit 99.2	Transcript of November 20, 2007 Earnings Call

EX-99.1

Exhibit 99.1
For further information, contact:
Hanover Capital Mortgage Holdings, Inc.
John Burchett, CEO, Irma Tavares, COO, or Harold McElraft, CFO
732-593-1044

HANOVER CAPITAL MORTGAGE HOLDINGS ANNOUNCES
2007 THIRD QUARTER RESULTS AND DECISION NOT TO DECLARE A DIVIDEND

     Edison, New Jersey, November 20, 2007 – Hanover Capital Mortgage Holdings, Inc. (AMEX: HCM) (the “Company” or “HCM”) reported a net loss for the quarter ended September 30, 2007 of $31.7 million, or $(3.83) per share on a fully diluted basis. The Board of Directors did not declare a third quarter dividend.

For the three months ended September 30, 2007, the Company 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 the Company’s subordinate mortgage-backed securities (“Subordinate MBS”) and a $1.5 million decrease in net interest income on its 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 the Company established in August of 2007.

For the nine months ended September 30, 2007, the Company experienced a net loss of $42.3 million compared to 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 the fair value of the Company’s Subordinate MBS portfolio, a $0.6 million decrease in net interest income on its Subordinate MBS portfolio, and a $0.5 million legal settlement, partially offset by a gain on sale of $1.3 million of its HCP business. The decrease in net interest income is a result of the increased financing costs associated with a new fixed-term financing facility the Company established in August of 2007. The gain on sale of the Company’s HCP business is included in income from discontinued operations.

John A. Burchett, President and Chief Executive Officer, commented, “The Company’s Board did not declare a third quarter dividend due to the continued uncertainties in the mortgage industry, the current interest rate environment and our net loss for the quarter.”

“Despite the large non-cash write-downs that the Company has taken as impairment expense against the fair value of its Subordinate MBS, as further described below, the Company’s portfolio continues to perform well overall, and the Company has experienced no significant decline in the performance of the Company’s Subordinate MBS portfolio. The $42.0 million impairment expense taken on the Subordinate MBS portfolio in the first nine months resulted in a $4.85 per share decrease in the Company’s book value. This write-down was taken based on estimated fair value as of September 30, 2007 when the market for this type of asset was basically not trading.  While management of the Company is unable to predict if and to what level these markets may improve, to the extent that they do improve, in the future, a portion of the resulting decline in book value could be reversed.”

“As shown on Page 6 of the tables included in this Press Release, the interest income on the Subordinated MBS portfolio assets was $5.1 million for the 3 months ended September 30, 2007 as compared to $4.5 million for the corresponding period in 2006. While the net interest income was reduced by the increased interest expense, the income numbers show the continued earning basis of the portfolio.”

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“The Company has seen increases in the level of losses on the underlying mortgage loans in its Subordinate MBS portfolio compared to its historical experience. However, these delinquencies still remain relatively low, as the Company’s underlying collateral continues to consist of prime jumbo residential mortgage loans, which types of loans have not seen the dramatic negative impact that has affected the sub-prime mortgage industry.”

“As the Company previously reported, the Company has entered into a one-year master repurchase agreement on August 10, 2007 (the “Repurchase Transaction”). The Company’s current operations under this new repurchase agreement 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 this repurchase facility.”

For the Company’s 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, the Company has determined, is due to other than temporary declines in fair value as of September 30, 2007 and the Company 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, the Company was still investing the proceeds from its $20 million trust preferred securities offering in November 2005 and was not fully invested until the end of March 2006. The Company 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. The Company sold 18 securities during the first two quarters of 2007, respectively, as part of a minor portfolio reorganization and anticipation of potential credit issues.

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 income interest rate. The increase in the effective interest expense rate is due to the higher borrowing costs associated with the Company’s new fixed-term financing facility 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.

HCM will host an investor conference call on Tuesday, November 20, 2007 at 11:00 AM ET. The call will be broadcast on the Internet at www.investorcalendar.com. To listen to the call, please go to the Web site at least fifteen minutes prior to the call to register, download, and install any necessary audio software. For those not able to listen to the live broadcast, a replay will be available for a period of 30 days.

To access the live call by phone, dial 877-407-8035 (international callers dial 201-689-8035) several minutes before the call. A recorded replay may be heard through Friday, November 23rd at 11:59 pm ET by dialing 877-660-6853 (international callers dial 201-612-7415) and using playback account #286 and conference ID # 261125.

Hanover Capital Mortgage Holdings, Inc. is a mortgage REIT staffed by seasoned mortgage capital markets professionals. HCM invests in prime mortgage loans and mortgage securities backed by prime mortgage loans. For further information, visit HCM’s Web site at www.hanovercapitalholdings.com.

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Certain statements in this press release may constitute “forward-looking” statements with the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements, to differ materially from future results, performance or achievements. The forward-looking statements are based on HCM’s current belief, 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 that are described in Item 1A of HCM’s Annual Report on Form 10-K for the year ended December 31, 2006 and in other securities filings by HCM. HCM’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this press release are made only as of the date hereof and HCM undertakes no obligation to update or revise the information contained in this announcement whether as a result of new information, subsequent events or circumstances or otherwise, unless otherwise required by law.

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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
Held for sale		—			—
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
Other subordinate security, held to maturity		2,801			2,757
Equity investment 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
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 to shareholders		(57,385	)		(56,173	)
Accumulated other comprehensive income		—			2,377
		12,061			57,583
	$	170,225		$	304,269

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HANOVER CAPITAL MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

	(Unaudited)						(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		—			(0.01	)		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		—			(0.01	)		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

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Hanover Capital Mortgage Holdings, Inc.
Summary Information for REIT Portfolio Assets
(dollars in thousands)
(Unaudited)

	Three Months Ended September 30, 2007
	Subordinate MBS			Agency MBS			Mortgage Loans
Average asset balance	$	142,660		$	50,826		$	6,902
Average CMO borrowing balance		—			—			4,456
Average balance - Repurchase Agreements		82,976			49,018			646
Net interest earning assets	$	59,684		$	1,808		$	1,800
Average leverage ratio		58.16	%		96.44	%		73.92	%
Effective interest income rate		14.34	%		5.89	%		6.37	%
Effective interest expense rate - CMO borrowing		—			—			6.01	%
Effective interest expense rate - Repurchase Agreements		17.23	%		5.54	%		7.43	%
Net interest spread		-2.89	%		0.35	%		0.18	%
Interest income		5,116			749			110
Interest expense - CMO borrowing					—			67
Interest expense - Repurchase Agreements		3,575			679			12
Net interest income	$	1,541		$	70		$	31
Yield on net interest earning assets		10.33	%		15.49	%		6.89	%

	Three Months Ended September 30, 2006
	Subordinate MBS			Agency MBS			Mortgage Loans
Average asset balance	$	152,004		$	114,202		$	11,749
Average CMO borrowing balance		—			—			9,009
Average balance - Repurchase Agreements		89,260			106,265			731
Net interest earning assets	$	62,744		$	7,937		$	2,009
Average leverage ratio		58.72	%		93.05	%		82.90	%
Effective interest income rate		11.85	%		5.81	%		6.91	%
Effective interest expense rate - CMO borrowing		—			—			7.10	%
Effective interest expense rate - Repurchase Agreements		6.65	%		5.46	%		7.11	%
Net interest spread		5.20	%		0.35	%		-0.19	%
Interest income		4,503			1,660			203
Interest expense - CMO borrowing		—			—			160
Interest expense - Repurchase Agreements		1,485			1,451			13
Net interest income	$	3,018		$	209		$	30
Yield on net interest earning assets		19.24	%		10.53	%		5.97	%

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Hanover Capital Mortgage Holdings, Inc.
Summary Information for REIT Portfolio Assets
(dollars in thousands)
(Unaudited)

	Nine Months Ended September 30, 2007
	Subordinate MBS			Agency MBS			Mortgage Loans
Average asset balance	$	146,879		$	88,330		$	8,231
Average CMO borrowing balance		—			—			5,720
Average balance - Repurchase Agreements		87,334			82,333			665
Net interest earning assets	$	59,545		$	5,997		$	1,846
Average leverage ratio		59.46	%		93.21	%		77.57	%
Effective interest income rate		13.04	%		5.75	%		6.51	%
Effective interest expense rate - CMO borrowing		—			—			6.39	%
Effective interest expense rate - Repurchase Agreements		9.89	%		5.39	%		7.22	%
Net interest spread		3.15	%		0.36	%		0.04	%
Interest income		14,368			3,811			402
Interest expense - CMO borrowing		—			—			274
Interest expense - Repurchase Agreements		6,475			3,328			36
Net interest income	$	7,893		$	483		$	92
Yield on net interest earning assets		17.67	%		10.74	%		6.64	%

	Nine Months Ended September 30, 2006
	Subordinate MBS			Agency MBS			Mortgage Loans
Average asset balance	$	132,230		$	81,457		$	16,571
Average CMO borrowing balance		—			—			9,937
Average balance - Repurchase Agreements		82,432			72,893			1,806
Net interest earning assets	$	49,798		$	8,564		$	4,828
Average leverage ratio		62.34	%		89.49	%		70.86	%
Effective interest income rate		12.46	%		5.56	%		6.89	%
Effective interest expense rate - CMO borrowing		—			—			6.48	%
Effective interest expense rate - Repurchase Agreements		6.30	%		5.12	%		6.72	%
Net interest spread		6.16	%		0.44	%		0.37	%
Interest income		12,354			3,396			857
Interest expense - CMO borrowing		—			—			483
Interest expense - Repurchase Agreements		3,893			2,797			91
Net interest income	$	8,461		$	599		$	283
Yield on net interest earning assets		22.65	%		9.33	%		7.82	%

*****

EX-99.2

Exhibit 99.2

Vcall

601 Moorefield Park Dr.

Richmond, VA 23236

Phone: 888-301-5399

Fax: 804-327-7554

info@vcall.com

www.vcall.com

www.investorcalendar.com

Transcript of
Hanover Capital Mortgage Holdings, Inc.
(HCM)
Q3 Earnings Results 2007
November 20, 2007

Participants

John A. Burchett, President and Chief Executive Officer

Presentation

Operator

Greetings and welcome to the Hanover Capital Mortgage Third Quarter Earnings Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. John Burchett, President and CEO. Thank you, Mr. Burchett, you may begin.

John A. Burchett – Hanover Capital Mortgage Holdings, Inc – President and Chief Executive Officer

Oh, thank you, I am joined here today by Harold McElraft, our Chief Financial Officer, Irma Tavares, our Chief Operating Officer, and Suzette Berrios, our General Counsel, who will be available along with myself to answer questions as we finish. Before we begin the presentation, I just wanted to remind everyone of our standard disclaimers about forward-looking statements that are set forth in both today’s earnings release and our form 10-Q for the quarter ended 09/30/07, filed yesterday with the SEC.

The quarter showed poor results, which is primarily a reflection of the current state of the mortgage market. The primary reason for the large loss and the large reduction in the book value is the mark to market of our primary asset subordinate mortgage-backed securities. The write down for the quarter, I’m sorry, the write down for the nine months ended 09/30/07 was approximately $42 million or $4.85 per share. This was a non-cash write down and we still own the securities and have not sold any securities recently, and we sold a few at the beginning of the year, but we still hold that portfolio.

The fair value is used to price these securities; it shows the results of a market that is basically frozen with no trading in the assets that comprise our portfolio. This has been the case relatively since mid August, just there’s not been any trading in that and the reason for our slight delay in putting — getting our numbers all in our 10-Q was the fact that we wanted to be certain we did the best job of presenting fair value for the portfolio as its stands given this extraordinary market with no trading and hard to find observable transactions to base our judgments on, but we do believe we put a proper fair value on the portfolio.

1

Vcall

601 Moorefield Park Dr.

Richmond, VA 23236

Phone: 888-301-5399

Fax: 804-327-7554

info@vcall.com

www.vcall.com

www.investorcalendar.com

As we mentioned in our press release where we cannot predict if, when or to what extent the markets will recover, any recovery would be an increase to our book value over time. Our securities continue to be backed by high quality prime loans. While our delinquencies have grown somewhat as shown on page 40 of the 10-Q, they do reflect prime assets and have not had the drastic decline in levels of performance as shown for both subprime and Alt A collateral throughout the market.

On the earning side of our portfolio, the return levels on our subordinate MBS also continue to meet our expectations. The effective interest rate was up to 14.3% over 11.85% as compared to the prior year quarter. This increase however has been helped by the reduction in the carrying value, which is the reduction in the denominator obviously. However, the gross income for the quarter on the subordinated MBS portfolio was $5.1 million or a 13.6% increase over the quarter and in the comparable quarter in 2006.

This increase income was more than offset by the increase in interest expense as a result of our August financing of our Wall Street repos with the broker firms. We’ve gone through that before in conversation with that financing that we got to alleviate us from the margin calls and the liquidity crisis in August is very expensive. As shown on page 16 of our 10-Q, our taxable income for the nine months at 09/30/2007 was minus $362,000. While this is a non-GAAP measure, it does give investors a comparison primarily relative to the non-cash charges reflected in our GAAP income. We believe, we have value in the economic value of our portfolio and the team of employees able to analyze value and manage credit risk in the mortgage market. As mentioned in our filing previously, we are working on raising capital in the preservation of value of our portfolio, as well as to allow us to use our employee capital to profitably invest in the current market. The current market offers significant opportunities for new capital investments.

While we are in conversation to raise capital, no agreements or commitments have been completed at this time. I want to thank you for your participation and assure you that your management team is working hard to preserve and grow the value of the company. We’ll now open it up to questions.

Operator

Thank you, ladies and gentlemen at this time, we will be conducting a question-and-answer session. If you would like to ask a question, you may press star one on your telephone key pad. A confirmation tone will indicate your line is in the question queue. You may press star two, if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pickup your hand sets before pressing the star keys.

Our first question comes from the line of Paul Burke with Stifel Nicolas. Please proceed with your question.

<Q>: Hi John, this is Paul Burke.

<A>: Hi Paul, how are you doing?

<Q>: I’m alright. I guess, now what is that you have as actual book value then or net asset value with marked out?

<A>: Our books, our current book value in $1.39 per share, and you know, as I said that was written down by the $4.85.

2

Vcall

601 Moorefield Park Dr.

Richmond, VA 23236

Phone: 888-301-5399

Fax: 804-327-7554

info@vcall.com

www.vcall.com

www.investorcalendar.com

<Q>: Okay.

<A>: So we have quoted over $4.85 write down from the beginning of the year which took it from $6.24 down to $1.39 plus.

<Q>: And is it the yield, is the yield on that portfolio is what now?

<A>: Over the yield on that portfolio, if you look on the press release on the last table and in the press release if you have it front of now, but for the quarter.

<Q>: This is that net asset value you have got the yield right?

<A>: Before the quarter, on an average balance, if you look at the average balance at the end of the quarter the balances were written down to a $130 million approximately. But for the quarter, the balance averages $142 million and on that $142 million in the balance. We had effective income, interest rate income of 14.34%.

<Q>: Okay.

<A>: Now, clearly that number as long as the dollars of income remain relatively the same, as they are now, that 14.34% will rise for the fourth quarter, as the balances come down as a result of the latest strikes and reduction in carry value. So that’s why I say it’s a little, its more probably informative to look at income dollars as opposed to the changes in the yield, because the yield reflects the write down to fair value that can be retained and probably will be fairly well so hopefully both up and down but, hopefully some ups here surely, but anyhow it could be very well but more importantly just look at the income coming out of the portfolio.

<Q>: The only, I guess a couple of things that is one I mentioned or ask, I mean, at this point I mean, I know we are in and somehow we got to be somewhat in a bunker mentality here. And we, I mean, we got to hope for the best, but we’ve got to somehow make sure that we get something out of this thing at the end if it goes...if nothing or you’re not going to be able to raise money, have you or you exploring that or what are our options at this point?

<A>: I don’t, no I don’t think it’s good to get into the specific options, but we are exploring a number of different types of options that would preserve value in the portfolio in the capital we have with us.

<Q>: And you guys still are, I guess you, I don’t know but whether or not and you guys still feel that this is still a viable plan, the way we are going, I mean, just from the spikes in the past. I know we are in the worse it looks like the worst possible situation at this point, but I mean even going forward it almost seems like we should structure this so that we can get out of this with the best possible situation with the least amount of dilution, seems like a viable alternative at this point. I mean?

<A>: I think the answer is we look at all possibilities and you know, linked with our Board of Directors and viewing what we think is the best answer for the shareholders at the end of the day. And you know we are looking at different possibilities. To the extent you’re asking me the question if we think it’s viable to go forward to the extent that we can get capital invest in the credit markets, we think there’s still good investments to be made and with the current market dislocation, we can make yield similar to or greater than we have in the past with leverage in the past and without leverage now, I mean, that’s obviously what caused us the problem in August was the fact that we did have leverage on these assets. But to the extent that current market

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offers the chance to use our credit abilities to buy assets that have good yields on them without leverage, we think that’s one viable strategy and all others we’re looking in.

<Q>: So, just one last question. And we in this point in time, the portfolio itself is not...you’re not seeing anymore payment delays or deterioration in the portfolio like it’s in the last 30 days or 90 days?

<A>: Well I think, you know, we’ve got the numbers on, I think I mentioned on page 40 of the K and the Q and they show that delinquencies are up somewhat, but I think we’re still under 1% of total delinquencies itself.

<Q>: Okay and that is also like in the last 30 days, can you say that or?

<A>: No, the only numbers we published is through September.

<Q>: Okay. Alright, thank you.

<A>: Yeah.

Operator

Ladies and Gentlemen, as a reminder it is star one to ask a question. Our next question comes from the line of Rudolf Carbone (Ph), who is a private investor. Please proceed with your question.

<Q>: Yes, I just wondered if you would be good enough to give us some idea of what you would tell another outsider the signs to look for in the publication of the news- paper words from the Federal Reserve that would give us some indication if the market is becoming a little bit more liquid, I mean, I mean from what I gather most of these problems of the cost varies in virtually in the market. It’s not so much the cash payments that have been made. So just give us if you would your views to what signs we could all look for that’s something is falling to change for the positive or I guess that’s about it?

<A>: Well it’s and that’s a pretty wide ranging question. I think to the extent that the Fannie and Freddie got involved with different levels there has been a talk about Fannie Mae and Freddie Mac being able to buy either more loans or loans with higher balances were either of those to come through and they had a significant pickup in the agency buying of loans, I think that would help the markets some. There are variety of both Federal and state programs going on to try to help borrowers in the sub-prime market, which have been the kind of the root cause of many of the problems, but to help those borrowers in the sub-prime market that have interest rates are going to rise dramatically at their old age. If this program is to help that out one way or another, I think that would help the market in terms of slowing down the declines in market values and also getting some liquidity back in the market.

I do think it will take a while for the major players, the Wall Street players who were a big buyer of this to come back. Normally, we would think that I said that there’s no trading in our securities which tends to be the lower-rated tranches of mortgage securitizations and even in the upper levels of the credit stock, the AAA and AA there’s some but not much trading but if that trading picks up that would be an indication that would eventually spread down to the other of the collateral. So there’re a number of things we can look to in terms of things getting better clearly on the upside or the downside with our market. Our market is prime loans and the prime driver of that is with two prime factors, one is the ability of people to keep their jobs

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and to pay their mortgages and so far the employment numbers have been relatively good, so I think that continuing good employment numbers would help us going forward.

<Q>: John, what about another cut or a couple of cuts from the Federal Reserve, can you think that, that would aside from the absolute impact, but do you think that would open the market a little bit or really at this stage not have too much affect on the market?

<A>: To the extent that it brought rates down for what we call a hybrid mortgages to cut this short into the curve down and made the housing more affordable on the short into the curve and hybrid which is 3, 5, and 7 year adjustable. Loans will go to one year after that period of time, which I think we’ve a pretty good product to the extent those are more affordable due to rate reduction that would help a lot.

<Q>: Now also a last question, it seems to me that if there are yields such as we’re getting a 14% or even anything in that area with the dollar being so low that they should be a whole slew of foreigners flocking to America to participate in this kind of paper. Why do you think that’s not happening?

<A>: Well I think it is — I don’t know exactly, but one thing for sure is to buy the kind of paper we buy you have to have the knowledge of the mortgage market and the systems to be able to be sort out what’s good and what’s bad. And in terms of looking at its own level so it takes some technology, it takes some knowledge, and experience in buying that and to the extent that, you know, just foreign money coming in and without that infrastructure would be hard to buy the assets and know they are getting the right ones, you know that’s being said and regularly we’ve heard there’s money coming into the hedge funds and that was in the paper yesterday. The hedge funds are increasing the money they have on board and we’ve heard again and a total of some of that money is looking to get into this market and we think that’s all good.

<Q>: If I could just ask one last question that occurred to me, there was a ruling by a Federal Judge on a foreclosure situation with the bank reported several days ago that see banks that proves sufficiently that they are into the mortgages because of these various tranches and stuff like that. Do you have any comment as to how that might complicate the whole market and whether or not we are potentially affected by such a ruling?

<A>: Two questions there, to the extent that would affect the whole market, my guess on that is those securities they didn’t properly have the documentation done or properly fairly minor in the market place. I wouldn’t think that there is a lot of that number one and number two in terms of our case to the extent that what we buy our mortgage-backed securities from Wall street but often that originators are the major financial institutions and we have representations and warranties from them and we have trustees whose responsibility is to make sure that the proper documentation and ownership is in place. So, to the extent that there was a loss as a result of improper documentation, in most cases we would have the ability to go back against the originator or the trustee to get compensated for that.

<Q>: Okay, thanks a lot.

<A>: Okay.

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Operator

Our next question comes from the line of William Stern with Stern Brothers and Company. Please proceed with your question.

<Q>: Thank you, good morning all. John, I think as with public discussion in the past this whole thing comes down as liquidity or that, we got to stay alive on and off. It’s my guess this in my (Indiscernible). My guess is we got to stay alive, you know upwards of two years for you guys to start beginning to receive the principal back on the sub pieces. And, we are down to like $8.6 million in cash and I don’t know how much of that is, you know its all free cash, but I don’t know how much excess that is. Can you discuss you know liquidity to stay alive for the next couple of years. So, you’ll start receiving some of the normal monthly payments as well as the prepayments from all these loans.

<A>: Well, at least critical thing on liquidity side, it is that we’ve got the repo with so, we put together. And obviously we are talking and working with them on solutions, but you know that comes due next August. We’ve clearly in terms of our current forecast have the cash to get through the next August with the current operations, but we need to solve that, that’s the major thing we need to solve this, how that’s going to be either refinance to pay it off or over time and that’s got both the ability to pay it off in cash and pay it off in kind.

<Q>: Yeah.

<A>: And a payment in kind obviously would depend a lot on the values and securities at that point in time.

<Q>: Right.

<A>: So, that completes the answer.

<Q>: How much in market value and/or book value do we have pledged to them?

<A>: We’ve our entire subordinate mortgage-backed securities portfolio pledged to that. So the $113 million of available.

<Q>: I got you, and that’s market and that’s not a new probably is that a $150 million of cost written down to $113.

<A>: It’s yeah, $113 plus $42. So, $155 million in cost and $227 million in balance.

<Q>: Yeah.

<A>: Yes, so $227 million in current balance of approximately on those securities. We brought them at an adjusted cost basis of around $155 million and they’ve been marked down this year in the nine months that I mentioned before by $42 million.

<Q>: Hi, so the $150 cost represents $240 face or something.

<A>: $227 face approximately.

<A>: All those numbers are in our 10-Q.

<Q>: Yeah ok.

<A>: But that’s an approximate number is pretty close.

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<Q>: Well just in line with the first caller’s question about taking some dilution. It’s just talk off the top of my head. It may make sense to take, you know, some dilution to raise I don’t know what the numbers 10 or 15 million to get you to the point, when those principals should start coming back. And my next question relates to I don’t know what your model show, but the speeds are probably lower then the initial model when you bought these, which may have been I don’t know 12% to 15% CPR. They are probably got to look at him with, you know, like half of that speed. When does that show the cash recycle?

<A>: Those and that numbers that we really have made public available, but just as a broad picture our portfolio is approximately in this is a guess sort of (Indiscernible) it in the 10-Q about two-thirds of it are hybrid arms and the bulk of those were originally five ones which were about two years old.

<Q>: Okay.

<A>: So we think a lot and there is going to be a lot of rolls coming up in the 2009 and 2010. And, you know, someone would have to put a speculation in terms of what’s going to happen at those rolls. If you look today, at a generic loan that was originated to prime loan that was five one that was originated two years ago. It’s roll coupon would probably be a point and three quarters or two points above what somebody could get a fixed rate loan for in today’s current interest rate throughout.

<Q>: Yeah.

<A>: So, you know, if you are in that position where, you’re well and above a point differential between where a loan would roll to, and where you could get a 15 or 30 year fixed. You would assume that a lot would pay off subject to house values and that underlying credit of individuals. So that’s really but all I can say, I mean there is a, you know, a kind of hub coming through our portfolio that would be in that timeframe.

<Q>: So I am just. Okay thank you. You’ve answered my question. I may come back with another one.

<A>: Ok, fine.

Operator

Our next question comes from the line of Holter Rickey (ph) which is a follow-up question. Please proceed with your question.

<Q>: And especially when this kind of profit is from is first this last question. What is like the worse case scenario then, if you have to give today you had to pay off Ramius what would be left?

<A>: It’s, we couldn’t tell right now, it will be a negotiated transaction. We don’t have to pay them off. So that is kind of a hypothetical, but it would be a negotiated transaction on where we felt the values of the portfolio would be.

<Q>: But in five, and let’s say when in August it comes up and it’s similar to this situation. They want to know acts, and you said that you’ve pledged their whole portfolio. So, in fact is our portfolio could be sold at this level right now?

<A>: It would be sold at that point in time; whatever, the level the point in time that we agreed to is the proper value. I really can’t state that and what that would be?

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<Q>: I know but if your ...you’ve agreed with that you would pay them off in August right?

<A>: That’s right the agreement was.

<Q>: Yeah, don’t get any more money in right now, you have to pay them off and the book value is about 39 what are we going to end up with?

<A>: I don’t have that number. Well that’s not the number I have run through.

<Q>: Could we get that number? Why couldn’t we get that? I just don’t, I don’t understand. I mean you must have an idea of what?

<A>: Future value that’s August 2008. It all depends on you know what the values are. It’s really speculative value and what the values are in August of next year.

<Q>: I know but it’s not speculative in terms of, I mean you got a deal with them, and if right now you have a firm value. If this value stays this price I mean what is the value that is enough?

<A>: Paul, in terms of today’s value, if you would just be, I guess the answer from adjusted today’s value just subtract the amount of that old against the amount of assets that would go away which would be equal and the book value would remain the same.

<Q>: No that book value right now is with Ramius unit.

<A>: Yes, I mean if you look at our balance sheet, our balance sheet has from the press release says the $113 million worth of available for sale of securities.

<Q>: Yes

<Q>: And it has a $107 million worth of repo liabilities.

<A>: And that part of that is Ramius.

<Q>: A part of that is Ramius.

<Q>: Okay.

<A>: So, if you subtract it the Ramius part out of the debt, the same amount of money would come out of the assets and then the book value would not change.

<Q>: Would be about the buck 39 and how do they get some kind of stipulation with equity or anything?

<A>: They already have equities. It’s already in the calculation for the $1.39.

<Q>: For the book value, okay, that’s all I needed, I appreciate that.

<A>: Okay thanks.

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Operator

Our next question is a follow-up question from Williams Stern (ph), please proceed with your question

<Q>: That’s right.

<Q>: You know Ramius’s repo is $80 as I recall, our total repo is $107 and which is $27 million against what I assume or the Freddie-Fannie trading portfolios securities you need to maintain and I wondered who that repos is with.

<A>: I don’t think that’s his name we’ve released.

<Q>: Okay.

<A>: It’s one of the major mortgage players but (Indiscernible)

<Q>: And given you like a 10% hair cut or so?

<A>: Little less than that.

<Q>: Alright, so you’ve any that’s only $30 million in fact increase a little bit it doesn’t help but it’s not disaster.

<Q>: Alright, great.

<A>: Alright, I’m done.

<Q>: Okay, thanks.

Operator

There are no further questions in the queue would you like to make some closing comments.

Yeah, again just briefly I think what I said before we thank you all for participating and asking obviously good questions, and we just want to assure you that we are all working hard to preserve and maintain and grow the value in the company and we do believe we both have the economic and people assets to do that and we are working hard to get that done. Thank you.

Operator

Ladies and gentlemen this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

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