HANOVER CAPITAL MORTGAGE HOLDINGS INC, DEF 14A, 1998-04-22

HANOVER CAPITAL MORTGAGE HOLDINGS INC
DEF 14A, 1998-04-22
MORTGAGE BANKERS & LOAN CORRESPONDENTS

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<PAGE> 1

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))

[X] Definitive Proxy Statement

[ ] Definitive Additional Materials

[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.

1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------

2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------

3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):

- --------------------------------------------------------------------------------

4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------

5) Total fee paid:

- --------------------------------------------------------------------------------

[ ] Fee paid previously with preliminary materials.

- --------------------------------------------------------------------------------

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

1) Amount Previously Paid:

- --------------------------------------------------------------------------------

2) Form, Schedule or Registration Statement No.:

- --------------------------------------------------------------------------------

3) Filing Party:

- --------------------------------------------------------------------------------

4) Dated Filed:

- --------------------------------------------------------------------------------
<PAGE> 2

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

90 WEST STREET, SUITE 1508
NEW YORK, NEW YORK 10006

1998 ANNUAL MEETING OF STOCKHOLDERS

May 21, 1998

TO OUR STOCKHOLDERS:

The 1998 Annual Meeting of the Stockholders of Hanover Capital Mortgage
Holdings, Inc. will be held on Thursday, May 21, 1998, at 11:00 a.m. at the
American Stock Exchange, 86 Trinity Place, New York, New York, for the following
purposes:

1. To elect six Directors, three to serve for a term of three years,
two to serve the balance of a term for two years and one to serve the
balance of a term for one year, all as more fully described in the
accompanying Proxy Statement.

2. To consider and act upon a proposal to ratify, confirm and approve
the selection of Deloitte & Touche LLP as the independent certified public
accountants of the Company for fiscal year 1998.

3. To consider and act upon any other business which may properly
come before the meeting.

The Board of Directors has fixed the close of business on April 20, 1998 as
the record date for the meeting. All stockholders of record on that date are
entitled to notice of and to vote at the meeting.

Your proxy is enclosed. You are cordially invited to attend the meeting,
but if you do not expect to attend, or if you plan to attend, but desire the
proxy holders to vote your shares, please date and sign your proxy and return it
in the enclosed postage paid envelope. The giving of this proxy will not affect
your right to vote in person in the event you attend. Please return the proxy
promptly to avoid the expense of additional proxy solicitation.

By order of the Board of Directors

JOYCE S. MIZERAK,
Managing Director, Director and
Secretary

New York, New York
April 24, 1998
<PAGE> 3

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

PROXY STATEMENT

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Hanover Capital Mortgage Holdings, Inc.
(the "Company") for use at the 1998 Annual Meeting of Stockholders to be held on
Thursday, May 21, 1998, at the time and place set forth in the notice of the
meeting, and at any adjournments thereof. The approximate date on which this
Proxy Statement and form of proxy are first being sent to stockholders is April
24, 1998.

If the enclosed proxy is properly executed and returned, it will be voted
in the manner directed by the stockholder. If no instructions are specified with
respect to any particular matter to be acted upon, proxies will be voted in
favor thereof. Any person giving the enclosed form of proxy has the power to
revoke it by voting in person at the meeting, or by giving written notice of
revocation to the Secretary of the Company at any time before the proxy is
exercised.

The holders of a majority in interest of all Common Stock issued,
outstanding and entitled to vote are required to be present in person or to be
represented by proxy at the meeting in order to constitute a quorum for the
transaction of business. The election of the nominees for Director will be
decided by plurality vote. The affirmative vote of the holders of at least a
majority of the shares of Common Stock voting in person or by proxy at the
meeting are required to approve all other matters listed in the notice of the
meeting.

The Company will bear the cost of the solicitation. It is expected that the
solicitation will be made primarily by mail, but regular employees or
representatives of the Company (none of whom will receive any extra compensation
for their activities) may also solicit proxies by telephone, telegraph and in
person and arrange for brokerage houses and other custodians, nominees and
fiduciaries to send proxies and proxy material to their principals at the
expense of the Company.

The Company's Annual Report on Form 10-K for the year ended December 31,
1997 is concurrently being provided to each stockholder.

The Company's principal executive offices are located at 90 West Street,
Suite 1508, New York, New York, 10006, telephone number (212) 732-5086.

RECORD DATE AND VOTING SECURITIES

Only stockholders of record at the close of business on April 20, 1998 are
entitled to notice of and to vote at the meeting. On that date, the Company had
outstanding and entitled to vote 6,466,677 shares of Common Stock, par value
$.01 per share. Each outstanding share of the Company's Common Stock entitles
the record holder to one vote.

ELECTION OF DIRECTORS

The Board of Directors is divided into three classes, with each class as
nearly equal in number as possible. One class is elected each year for a term of
three years. In addition, any director that was appointed by the Board of
Directors to fill a vacancy holds office until the next annual meeting of
stockholders, at which time the stockholders elect a director to hold office for
the balance of the term then remaining. It is proposed that each nominee listed
below whose term expires at this meeting be elected to serve a term of three
years and until his successor is duly elected and qualified or until he sooner
dies, resigns or is removed. It is also proposed that each nominee listed below
who was appointed by the Board of Directors to fill a vacancy be
<PAGE> 4

elected to serve the balance of his term and until his successor is duly elected
and qualified or until he sooner dies, resigns or is removed.

The persons named in the accompanying proxy will vote, unless authority is
withheld, for the election of the nominees named below, all of whom are now
members of and constitute the Company's Board of Directors. The Company is
advised that all of the nominees have indicated their availability and
willingness to serve if elected. If such nominees should become unavailable for
election, which is not anticipated, the persons named in the accompanying proxy
will vote for such substitute as the Board of Directors may recommend. The
nominees are not related to any executive officer of the Company or its
subsidiaries.

<TABLE>
<CAPTION>
POSITION WITH THE COMPANY OR PRINCIPAL
NAME OF DIRECTOR AGE OCCUPATION DURING THE PAST FIVE YEARS
- ---------------- --- --------------------------------------
<S> <C> <C>
NOMINATED FOR A TERM ENDING
IN 2001:

George J. Ostendorf.................... 53 George J. Ostendorf has served as a director of the
Company since its inception in June 1997. Mr.
Ostendorf also serves as a managing director of the
Company. Mr. Ostendorf has also been a managing
director of Hanover Capital Partners Ltd. ("HCP"), a
subsidiary of the Company, since its formation in
1989. Mr. Ostendorf's duties at HCP included senior
relationship management of HCP's clients which range
from small depository institutions to the large
mortgage lenders. Prior to joining HCP, Mr. Ostendorf
was responsible for origination and distribution of
mortgage securities by Chicago based sales forces that
he managed for Citicorp Investment Bank and later for
Bankers Trust Company.

John Nicholas Rees..................... 64 John Nicholas Rees has served as a director of the
Company since the consummation of the Company's
initial public offering in September 1997. Since 1985,
Mr. Rees has been President of Pilot Management, a
privately held investor/consultant firm. From 1974 to
1985, Mr. Rees was Vice Chairman of the Bank of New
England Corporation where he was responsible for its
finance, strategic planning, money market, government
banking and data processing operations.

Joseph Freeman......................... 65 Joseph Freeman has served as a director of the Company
since October 1997. Since 1986, Mr. Freeman has been
the President of LRF Investments, Inc., a privately
held venture capital firm. Mr. Freeman is currently on
the Board of Directors of LRF Investments, Inc.,
Newton Group, Inc. and Work Management Solutions, Inc.
</TABLE>

2
<PAGE> 5

Robert Campbell........................ 64 Robert Campbell has served as a director of the
Company since January 1998. Mr. Campbell is a retired
former Vice Chairman of the Board of Directors of
Johnson & Johnson. Mr. Campbell had assumed this
position in April 1989. Among his professional
affiliations, Mr. Campbell is Chairman of the Board of
The Cancer Institute of New Jersey and Chairman of the
Board of Trustees of Fordham University. He is also a
member of the Board of The Robert Wood Johnson
Foundation, ARGO Med, Inc. and The Parker Memorial
Home, is a member of the Advisory Council for the
College of Science of the University of Notre Dame, is
Chairman of the Board of New Brunswick Affiliated
Hospitals and is Chairman of the Board of the Family
Practice Center of St. Peter's Medical Center.

NOMINATED FOR THE BALANCE OF THE TERM
ENDING IN 2000:

John A. Clymer......................... 49 John A. Clymer has served as a director of the Company
since the consummation of the Company's initial public
offering in September 1997. Since September 1994, Mr.
Clymer has been the President and Chief Investment
Officer of Resource Capital Advisers, Inc. From 1972
until January 1994, Mr. Clymer was employed by
Minnesota Mutual Life Insurance and for the period
from 1991 to 1994 was the President of Minnesota
Mutual Life Insurance. Among his professional
affiliations, Mr. Clymer is a member of the Board of
Hudson Medical Center, Inc., Hudson Hospital
Corporation, Inc., Resources Companies, Inc. and WTC
Industries, Inc.

Saiyid Naqvi........................... 48 Saiyid Naqvi has served as a director of the Company
since March 1998. Mr. Naqvi is the President and Chief
Executive Officer of PNC Mortgage (formerly Sears
Mortgage Corporation). He joined PNC Mortgage in 1993
with the acquisition of Sears Mortgage Corporation,
which he had joined in 1985 as senior vice president
of secondary marketing.

SERVING A TERM ENDING IN 2000:

John A. Burchett....................... 55 John A. Burchett has been the Chairman of the Board,
President and Chief Executive Officer of the Company
since its inception in June 1997. Mr. Burchett has
also been the Chairman of the Board, President and
Chief Executive Officer of each of HCP and Hanover
Capital Mortgage Corporation, a subsidiary of HCP,
since each of their formations in 1989 and 1992,
respectively. Prior to the founding of HCP, Mr.
Burchett held executive positions in the national
mortgage finance operations of two global financial
institutions: Citicorp Investment Bank from 1980 to
1987 and Bankers Trust Company from 1987 to 1989.
</TABLE>

3
<PAGE> 6

Joyce S. Mizerak....................... 42 Joyce S. Mizerak has been a Director, Managing
Director and Secretary of the Company since its
inception in June 1997. Ms. Mizerak has also been a
Managing Director and Director of HCP since its
formation in 1989. Prior to joining HCP, Ms. Mizerak
had responsibilities at Bankers Trust Company from
1988 to 1989 for mortgage transaction contracts.
Before joining Bankers Trust Company, Ms. Mizerak held
a variety of positions at Citicorp Investment Bank
from 1984 to 1988 including the trading of whole
mortgage loans for Citicorp's Citimae residential
mortgage conduit.

Irma N. Tavares........................ 43 Irma N. Tavares has been a Director and Managing
Director of the Company since its inception in June
1997. Ms. Tavares has also been a Managing Director
and Director of HCP since its formation in 1989. Prior
to joining HCP, Ms. Tavares held trading positions at
both Citicorp Investment Bank from 1983 to 1987 and
Bankers Trust Company from 1987 to 1989.
</TABLE>

EXECUTIVE OFFICERS

In addition to the directors named above, the Company has the following
executive officers:

NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Ralph F. Laughlin...................... 44 Ralph F. Laughlin has been a Senior Vice President,
Chief Financial Officer, Treasurer and Assistant
Secretary of the Company since its inception in June
1997. Mr. Laughlin has also been Chief Financial
Officer of HCP since May 1996. Prior to 1996, Mr.
Laughlin was Vice President of Finance for Middex
Development Corporation, a New York based owner and
operator of office buildings, shopping centers and
hotels, and the holder of a controlling interest in
Hodgson Houses, Inc., a publicly traded modular home
builder.

Julia Curran........................... 36 Julia Curran has been Senior Vice President of the
Company since its inception in June 1997. Ms. Curran
is also a Senior Vice President of HCP and has been
employed by HCP since 1990. Prior to joining HCP, Ms.
Curran held various mortgage servicing positions at
Bankers Trust Company and mortgage loan delivery and
servicing positions at City Federal Savings.

James C. Strickler, Jr................. 41 James C. Strickler, Jr. has been Senior Vice President
of the Company since its inception in June 1997. Mr.
Strickler is also a Senior Vice President of HCP and
has been employed by HCP since 1995. Prior to joining
HCP, Mr. Strickler held the position of trader of
whole loans, asset backed securities and non-agency
mortgage backed securities with Lehman Brothers Inc.
from 1992 to 1995 and with Chemical Bank from 1988 to
1992.
</TABLE>

4
<PAGE> 7

INFORMATION CONCERNING THE BOARD OF DIRECTORS

During fiscal 1997, there were two meetings of the Board of Directors of
the Company. With the exception of Mr. Rees, who did not attend one of the
meetings of the Board of Directors, all of the Directors attended at least 75%
of the aggregate of (i) the total number of meetings of the Board of Directors
during which they served as Director and (ii) the total number of meetings held
by committees of the Board of Directors on which they served. The Board of
Directors does not have a Nominating Committee. The outside Directors of the
Company receive an annual director's fee equal to $15,000, payable on a
quarterly basis. Each of Mr. Burchett, Mr. Ostendorf, Ms. Mizerak and Ms.
Tavares received compensation as employees of HCP, a subsidiary of the Company.
See "Compensation Committee Interlocks and Insider Participation -- Certain
Relationships and Related Transactions -- Employment Agreements" and
"-- Management Agreement." In addition, the Company pays each outside Director
$500 plus reimbursement of travel expenses in connection with their attending
each meeting of the Board of Directors of the Company.

The Board of Directors has a Compensation Committee whose members are Mr.
Clymer, Mr. Rees and Mr. Freeman. The Compensation Committee annually reviews
the Company's compensation policy for executive officers and makes
recommendations to the Board of Directors with respect to that policy, as well
as making compensation decisions for executive officers, and it administers the
Company's Bonus Incentive Compensation Plan and the Company's 1997 Stock Option
Plan. During fiscal 1997, there were no meetings of the Compensation Committee.

The Company also has an Audit Committee whose present members are Mr.
Burchett, Ms. Tavares, Mr. Clymer, Mr. Rees and Mr. Freeman. The Audit Committee
recommends to the Board of Directors the selection of independent public
accountants to serve as the Company's auditors, and reviews the scope of their
audit, their audit report and any recommendations made by them. The Audit
Committee also conducts reviews of any related-party transactions or potential
conflict of interest situations. During fiscal 1997, there were no meetings of
the Audit Committee.

5
<PAGE> 8

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of March
31, 1998 by (1) each person known to the Company to beneficially own more than
five percent of the Company's Common Stock, (2) each Director of the Company,
(3) each executive officer of the Company and (4) all Directors and executive
officers of the Company as a group. Unless otherwise indicated in the footnotes
to the table, the beneficial owners named have, to the knowledge of the Company,
sole voting and investment power with respect to the shares beneficially owned.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
- ------------------------ ------------------ --------------------
<S> <C> <C>
Ryback Management Corporation(1).......................... 400,000(2) 6.19%
John A. Burchett(3)....................................... 397,177(4) 6.14%
Irma N. Tavares(5)........................................ 107,500 1.66%
Joyce S. Mizerak(5)....................................... 107,500 1.66%
George J. Ostendorf(6).................................... 107,500 1.66%
John A. Clymer(7)......................................... 2,000(8) *
John Nicholas Rees(9)..................................... 2,000(8) *
Joseph Freeman(10)........................................ 2,000(8) *
Robert E. Campbell(11).................................... 2,000(8) *
Saiyid Naqvi(12).......................................... 2,000(8) *
Ralph F. Laughlin(5)...................................... 800(13) *
James C. Strickler(3)..................................... -- --
Julia Curran(3)........................................... -- --
All executive officers and directors as a group
(12 persons)............................................ 730,477 11.28%
</TABLE>

- ---------------
* Less than one percent.

(1) Address is 7711 Carondelet Avenue, Box 16900, St. Louis, Missouri 63105.

(2) According to a Schedule 13G filed with the Securities and Exchange
Commission on or before February 14, 1998.

(3) Address is 90 West Street, Suite 1508, New York, New York 10006.

(4) Includes 3,000 shares of Common Stock held by his children to which he
disclaims beneficial ownership.

(5) Address is 100 Metroplex Drive, Suite 301, Edison, New Jersey 08817.

(6) Address is 7140 West Higgins Avenue, Chicago, Illinois 60656.

(7) Address is 900 Second Avenue, S., Suite 300, Minneapolis, Minnesota 55402.

(8) Includes 2,000 shares of Common Stock which each of Mr. Clymer, Mr. Rees,
Mr. Freeman, Mr. Campbell and Mr. Naqvi has the right to acquire within
sixty days pursuant to the 1997 Executive and Non-Employee Director Stock
Option Plan.

(9) Address is 101 Granite Street, Rockport, Massachusetts 01966.

(10) Address is 60 Wells Avenue, Newton, Massachusetts 02159.

(11) Address is 100 Albany Street, Suite 200, New Brunswick, New Jersey 08901.

(12) Address is 75 North Fairway Drive, Vernon Hills, Illinois 60061.

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<PAGE> 9

(13) Includes 400 shares of Common Stock which Mr. Laughlin has the right to
acquire within sixty days pursuant to the exercise of warrants.

EXECUTIVE COMPENSATION

The Company had no employees in 1997 and as such had no executive
compensation. The executive officers of the Company are also the executive
officers of HCP and as such received all of their compensation from HCP; a
portion of which was billed to the Company pursuant to the Management Agreement.
See "Compensation Committee Interlocks and Insider Participation -- Certain
Relationships -- Management Agreement." John A. Burchett, Irma N. Tavares, Joyce
S. Mizerak and George J. Ostendorf (collectively, the "Principals") became
employees of the Company as of January 1, 1998.

The following table contains information concerning compensation earned in
the years ended December 31, 1997 and December 31, 1996 by HCP's Chief Executive
Officer and its four other most senior executive officers who received total
salary and bonus in excess of $100,000 during the fiscal years ended December
31, 1997 and 1996 (the "Named Executive Officers"):

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ -------------------------------
OTHER SECURITIES LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(1) COMPENSATION UNDERLYING OPTIONS PAYOUTS
- --------------------------- ---- --------- -------- ------------ ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
John A. Burchett(2)....... 1997 $287,500(3) $545,715 $22,633(4) 113,737 $4,537,510
Chairman of the Board, 1996 250,000 110,000 25,195(5)
Chief Executive Officer
and President

Irma N. Tavares(2)........ 1997 213,750(6) 372,245 9,122(7) 43,029 1,237,500
Managing Director and a 1996 180,000 150,000 9,054(8)
Director

Joyce S. Mizerak(2)....... 1997 213,750(9) 372,245 7,959(10) 43,029 1,237,500
Managing Director and a 1996 180,000 150,000 7,515(11)
Director

George J. Ostendorf(2).... 1997 225,000 141,271 16,728(12) 43,029 1,237,500
Managing Director and a 1996 225,000 35,000 16,972(13)
Director

James C. Strickler........ 1997 130,000 50,000 12,500
Senior Vice President 1996 129,583 5,000
</TABLE>

- ---------------
(1) Salary and bonus amounts are presented in the period earned; however, the
payment of such amounts may have occurred in other periods.

(2) Each of these persons entered into a five year Employment Agreement with
the Company on September 19, 1997. During 1997, this compensation was paid
by HCP. Beginning January 1, 1998, the compensation is paid by the Company.

(3) Pursuant to his Employment Agreement, Mr. Burchett receives a base annual
salary of $300,000.

(4) Includes $6,908 for an automobile allowance, $13,385 for life insurance
premiums and $2,340 for club membership dues.

(5) Includes $6,609 for an automobile allowance, $16,246 for life insurance
premiums and $2,340 for club membership dues.

(6) Pursuant to her Employment Agreement, Ms. Tavares receives a base annual
salary of $225,000.

(7) Includes $7,200 for personal use of a company leased automobile and $1,922
life insurance premiums.

(8) Includes $6,800 for personal use of a company leased automobile and $2,254
life insurance premiums.

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<PAGE> 10

(9) Pursuant to her Employment Agreement, Ms. Mizerak receives a base annual
salary of $225,000.

(10) Includes $6,299 for an automobile allowance and $1,660 for life insurance
premiums.

(11) Includes $5,541 for an automobile allowance and $1,974 for life insurance
premiums.

(12) Includes $7,200 for an automobile allowance, $7,368 for life insurance
premiums and $2,160 for club membership dues.

(13) Includes $6,516 for an automobile allowance, $8,656 for life insurance
premiums and $1,800 for club membership dues.

The Company established a Bonus Incentive Compensation Plan for eligible
participants of the Company. The annual bonus pursuant to the Bonus Incentive
Compensation Plan will be paid one-half in cash and, subject to certain
ownership limitations, one-half in shares of common stock, annually, following
receipt of the Company's audit from its independent public accountants for the
related fiscal year (or prorated fiscal year). This Bonus Incentive Compensation
Plan will award bonuses annually to those eligible participants out of a total
pool based upon annual net income before bonus incentive compensation as
follows:

ACTUAL ROE(1)
IN EXCESS
OF BASE PLUS FIXED
BROE(2) BY: BONUS % MULTIPLIED BY MINIMUM BONUS
- ------------- ------- ------------- -------------
<S> <C> <C> <C>
Zero or less.......................... 0% Bonus Base(4) 0%
Zero to 6%............................ 12.00% Bonus Base(4) 0%
Greater than 6%....................... 15.00% Incremental Average Net Worth
Bonus Base(5) multiplied by .72%
</TABLE>

- ---------------
(1) "Actual ROE" means the Company's return on equity and is determined on an
annual basis by dividing (a) the Company's annual Net Income before bonus
incentive compensation, by (b) the Average Net Worth for the same fiscal
year. For such calculations "Net Income" of the Company means the net income
or net loss of the Company determined according to GAAP.

(2) "Base BROE" is the average weekly Ten-Year U.S. Treasury Rate, plus 4.0% for
each fiscal year.

(3) "Average Net Worth" is the annual average of the end of the month Net Worth
of the Company (as determined in accordance with GAAP); without regard to
earnings or losses generated in the current fiscal year.

(4) "Bonus Base" is equal to (a) the annual Net Income before bonus incentive
compensation minus (b) (i) the Average Net Worth multiplied by (ii) the Base
BROE.

(5) "Incremental Bonus Base" is equal to (a) the annual Net Income before bonus
incentive compensation minus (b) (i) the Average Net Worth multiplied by
(ii) the Base BROE, minus (c) (i) the Average Net Worth
multiplied by (ii) 6%.

Of the amount so determined, one-half will be deemed contributed to the
total pool in cash and the other half will be deemed contributed to the total
pool in the form of shares of common stock with the number of shares of common
stock to be calculated based on the average price per share of the common stock
during the twenty day period that ends on the date of such determination.

No incentive compensation bonuses were earned for the year ended
December 31, 1997.

8
<PAGE> 11

OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997

The following table sets forth certain information regarding stock options
granted in 1997 to the Named Executive Officers:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZED VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------------
NAME GRANTED(#)(1) IN 1997 ($/SHARE) DATE 5%($) 10%($)
- ---- ------------- ------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John A. Burchett......... 89,467 28.37% $15.00 Sept. 2007 $1,062,578 $2,486,892
24,270 7.70% $15.75 Sept. 2007 270,046 656,425
Irma N. Tavares.......... 24,399 7.74% $15.00 Sept. 2007 289,781 678,213
18,630 5.91% $15.75 Sept. 2007 207,292 503,881
Joyce S. Mizerak......... 24,399 7.74% $15.00 Sept. 2007 289,781 678,213
18,630 5.91% $15.75 Sept. 2007 207,292 503,881
George J. Ostendorf...... 24,399 7.74% $15.00 Sept. 2007 289,781 678,213
18,630 5.91% $15.75 Sept. 2007 207,292 503,881
James C. Strickler....... 12,500 3.96% $15.75 Sept. 2007 139,085 338,084
</TABLE>

- ---------------
(1) All options listed were granted pursuant to the 1997 Stock Option Plan.
Option exercise prices were at the market price when granted. The options
have a term of 10 years and vest over a three year period if certain returns
on the Company's securities are met. See "-- 1997 Stock Option Plan." The
exercise price must be paid in cash or its equivalent as determined by the
Compensation Committee.

(2) The potential realizable value of the options, if any, granted in 1997 to
each of the Named Executive Officers was calculated by multiplying those
options by the excess of (a) the assumed market value, at September 2007, of
common stock if the market value of the common stock were to increase 5% or
10% in each year of the option's 10-year term over (b) the base price shown.
This calculation does not take into account any taxes or other expenses
which might be owed. The assumed market value at a 5% assumed annual
appreciation rate over the 10-year term is $26.88 and such value at a 10%
assumed annual appreciation rate over that term is $42.80. At $26.88, the
total market value of the shares of common stock outstanding on March 31,
1998 would be $173,824,277 which would be an increase of $67,124,107 from
market value of such shares at the close of business on December 31, 1997.
At $42.80, the total market value of shares of common stock outstanding on
March 31, 1998 would be $276,773,776 which would be an increase of
$170,073,605 from market value of such shares at close of business on
December 31, 1997. The 5% and 10% appreciation rates are set forth in the
Securities and Exchange Commission rules and no representation is, of
course, made that the common stock will appreciate at these assumed rates or
at all.

9
<PAGE> 12

AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1997
AND FISCAL YEAR END OPTION VALUES

The following table sets forth certain information concerning the value of
stock options held at December 31, 1997 by the Named Executive Officers of the
Company. None of the Named Executive Officers exercised any stock options during
the year ended December 31, 1997.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
SHARES ACQUIRED VALUE --------------------------- ------------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
- ---- --------------- ----------- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John A. Burchett....... 0 $0 0 89,467 $0 $67,100
24,270 0 0
Irma N. Tavares........ 0 0 0 24,399 0 18,299
18,630 0 0
Joyce S. Mizerak....... 0 0 0 24,399 0 18,299
18,630 0 0
George J. Ostendorf.... 0 0 0 24,399 0 18,299
18,630 0 0
James C. Strickler..... 0 0 0 12,500 0 0
</TABLE>

- ---------------
(1) The value of unexercised options is based on the fair market value of the
underlying securities at December 31, 1997 ($15.75) minus the exercise
price. The fair market value of the underlying securities was determined by
allocating a portion of the increase in the fair market value of a unit to
the warrant by subtracting from the closing price of the Company's units at
December 31, 1997 ($16.50) one-half of the difference between the closing
price of the Company's units at December 31, 1997 and the initial public
offering price per unit ($15.00).

1997 STOCK OPTION PLAN

The Company has adopted the 1997 Executive and Non-Employee Director Stock
Option Plan (the "Stock Option Plan"), which provides for the grant of qualified
incentive stock options ("ISOs") which meet the requirements of Section 422 of
the Internal Revenue Code, stock options not so qualified ("NQSOs"), deferred
stock, restricted stock, performance shares, stock appreciation and limited
stock awards ("Awards") and dividend equivalent rights ("DERs"). The Stock
Option Plan is intended to provide a means of performance-based compensation in
order to attract and retain qualified personnel and to afford additional
incentive to others to increase their efforts in providing significant services
to the Company. The Stock Option Plan is administered by the Compensation
Committee. Members of the Compensation Committee are eligible to receive only
NQSOs.

Options granted under the Stock Option Plan become exercisable in
accordance with the terms of grant made by the Compensation Committee. Awards
are subject to the terms and restrictions of the Awards made by the Compensation
Committee. Option and Award recipients must enter into a written stock option
agreement with the Company. The Compensation Committee has discretionary
authority to select participants from among eligible persons and to determine at
the time an option or Award is granted when and in what increments shares
covered by the option or Award may be purchased or will vest and, in the case of
options, whether it is intended to be an ISO or a NQSO provided, however, that
certain restrictions applicable to ISOs are mandatory, including a requirement
that ISOs not be issued for less than 100% of the then fair market value of the
common stock (110% in the case of a grantee who holds more than 10% of the
outstanding common stock) and a maximum term of ten years (five years in the
case of a grantee who holds more than

10
<PAGE> 13

10% of the outstanding common stock). Fair market value means as of any given
date, with respect to any option or Award granted, at the discretion of the
Board of Directors or the Compensation Committee, (i) the closing sale price of
the common stock on such date as reported in the Wall Street Journal or (ii) the
average of the closing price of the common stock on each day of which it was
traded over a period of up to twenty trading days immediately prior to such
date, or (iii) if the common stock is not publicly traded, the fair market value
of the common stock as otherwise determined by the Board of Directors or the
Compensation Committee in the good faith exercise of its discretion.

Officers, directors and employees of the Company or subsidiaries of the
Company and other persons expected to provide significant services to the
Company are eligible to participate in the Stock Option Plan. ISOs may be
granted to the officers and key employees of the Company and subsidiaries of the
Company. NQSOs and Awards may be granted to the directors, officers, key
employees, agents and consultants of the Company or any of its subsidiaries.

Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option Plan authorizes the grant of options to
purchase, and Awards of, an aggregate of up to 325,333 shares of the Company's
common stock. If an option granted under the Stock Option Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance of
further options or Awards under the Stock Option Plan.

Unless previously terminated by the Board of Directors, the Stock Option
Plan will terminate ten years from the date of approval and no options or Awards
may be granted under the Stock Option Plan thereafter, but existing options or
Awards remain in effect until the options are exercised or the options or the
Awards are terminated by their terms. Each option must terminate no more than
ten years from the date it is granted (or five years in the case of ISOs granted
to an employee who is deemed to own in excess of 10% of the combined voting
power of the Company's outstanding equity stock). Options may be granted on
terms providing for exercise either in whole or in part at any time or times
during their restrictive terms, or only in specified percentages at stated time
periods or intervals during the term of the option.

The aggregate fair market value (determined as of the time of grant) of the
shares with respect to which ISOs are exercisable for the first time by an
employee during any calendar year may not exceed $100,000.

The exercise price of any option granted under the Stock Option Plan is
payable in full in cash, or its equivalent as determined by the Compensation
Committee. The Company may make loans available to options holders to permit
them to exercise options. Any such loan must be evidenced by a promissory note
executed by the option holder and secured by a pledge of common stock of the
Company with fair value at least equal to the principal of the promissory note
unless otherwise determined by the Compensation Committee.

The Board of Directors may, without affecting any outstanding options or
Awards, from time to time revise or amend the Stock Option Plan, and may suspend
or discontinue it at any time. However, no such revision or amendment may,
without stockholder approval, increase the number of shares subject to the Stock
Option Plan, modify the class of participants eligible to receive options or
Awards granted under the Stock Option Plan or extend the maximum option term
under the Stock Option Plan.

All stock options granted by the Compensation Committee pursuant to the
Stock Option Plan are contingent and may vest, subject to other vesting
requirements imposed by the Compensation Committee, in full or in part on any
September 30 beginning with September 30, 1998 and ending with September 30,
2002 (each, an "Earn-Out Measuring Date"). Subject to any other applicable
vesting restrictions, any outstanding stock options will vest in full as of any
Earn-Out Measuring Date through which the return on a unit offered in the
Company's initial public offering is at least equal to the initial public
offering price of the unit. In addition,

11
<PAGE> 14

subject to any other applicable vesting restrictions, one-third of any
outstanding stock options will vest as of any Earn-Out Measuring Date through
which the return on a unit is at least equal to a 20% annualized return on the
initial public offering price of the unit. The return on a unit is determined by
adding (i) the appreciation in the value of the unit since the closing of the
initial public offering and (ii) the amount of distributions made by the Company
on the share of common stock included in the unit since the closing of the
initial public offering. The appreciation in the value of a unit as of any
Earn-Out Measuring Date is the average difference, during the 30 day period that
ends on the Earn-Out Measuring Date, between the market price of the shares of
common stock included in the unit and the initial public offering price of the
unit multiplied by two to take into account the value of the warrant included in
the unit. In determining whether such stock options have vested, appropriate
adjustments will be made for stock splits, recapitalizations, stock dividends
and transactions having similar effects.

Pursuant to the Management Agreement, the Company intends to cancel options
to purchase 72,509 shares of common stock of the Company that were issued to
employees of HCP in 1997 and reissue such options directly to HCP. HCP will then
grant its employees the right to exercise these options. See "Compensation
Committee Interlocks and Insider Participation -- Certain Relationships and
Related Transactions -- Management Agreement."

12
<PAGE> 15

COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION

The Company has developed and implemented executive compensation policies
and plans, including incentive and stock option plans, which seek to enhance the
profitability and value of the Company. These policies are administered by the
Company's Compensation Committee. The principal objective is to align closely
the financial interests of the Company's executives with those of its
stockholders. Therefore, the Company's compensation policies are structured to
link the compensation of the Company's Chief Executive Officer and other
executive officers with the financial performance of the Company.

The Company's executive compensation policy is to set base salary at the
minimum level considered sufficient to attract and retain qualified executive
officers. The Company provides performance-based variable compensation, thus
allowing the total compensation of executive officers to fluctuate depending
upon the Company's performance.

The Company has adopted the Stock Option Plan to provide employees with
options to acquire common stock of the Company. Under the Stock Option Plan,
incentive stock options and non-qualified stock options may be granted to key
employees, directors and consultants of the Company and its subsidiaries. To
date, all options granted under the Stock Option Plan have been granted at an
exercise price equal to the fair market value on the date of grant. The Company
awarded stock options under the Stock Option Plan to executive officers during
1997. These stock options are intended to provide an incentive to the Company's
executive officers and other key employees to increase the market value of the
Common Stock of the Company, thus linking the performance of the Company to
executive compensation.

The Company has also adopted a Bonus Incentive Compensation Plan, which
provides annual bonuses for eligible participants of the Company. The bonuses
awarded under this plan are based upon the annual net income of the Company and
therefore also provides an incentive to the Company's executive officers and
other key employees to increase the market value of the Company.

The compensation packages for Mr. Burchett (the Chief Executive Officer of
the Company), Ms. Tavares, Ms. Mizerak and Mr. Ostendorf were established in a
negotiated process at the time of the Company's initial public offering. The
purpose of these compensation packages were to retain the experience and talents
of these individuals. As with other executive compensation of the Company, these
arrangements consist of base salaries, stock options and annual bonuses based
upon the annual net income of the Company, all of which is intended to encourage
corporate performance.

COMPENSATION COMMITTEE

John A. Clymer
John Nicholas Rees
Joseph Freeman

13
<PAGE> 16

COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION

GENERAL

No interlocking relationship exists between the Company's Board of
Directors or officers responsible for compensation decisions and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Management Agreement

Effective as of January 1, 1998, the Company entered into a Management
Agreement (the "Management Agreement") with HCP. Under this agreement, HCP,
subject to the direction and control of the Company's Board of Directors,
provides certain services for the Company, including, among other things: (i)
serving as the Company's consultant with respect to formulation of investment
criteria and preparation of policy guidelines by the Board of Directors; (ii)
assisting the Company in developing criteria for the purchase of mortgage assets
that are specifically tailored to the Company's investment objectives; (iii)
representing the Company in connection with the purchase and commitment to
purchase or sell mortgage assets; (iv) arranging for the issuance of mortgage
securities from a pool of mortgage loans; (v) furnishing reports and statistical
and economic research to the Company regarding the Company's activities and the
services performed for the Company by HCP; (vi) monitoring and providing to the
Board of Directors on an ongoing basis price information and other data; (vii)
investing or reinvesting any money of the Company in accordance with its
policies and procedures and the terms and conditions of the Management
Agreement; (viii) providing the executive and administrative personnel office
space and services required in rendering such services to the Company; and (ix)
administering the day-to-day operations of the Company. For these services, the
Company pays HCP for each month an amount equal to the sum of (a) the wages and
salaries of the personnel employed by HCP and/or its affiliates (other than
independent contractors and other third parties rendering due diligence services
in connection with the acquisition of any mortgage assets) apportioned to the
Company for such month, plus (b) twenty-five percent (25%) of (a). The Company
also is required to pay HCP for each month an amount equal to the sum of (c) the
expenses of HCP for any due diligence services provided by independent
contractors and other third parties in connection with the acquisition of any
mortgage assets during such month plus (d) three percent (3%) of (c). Any amount
that may become payable by HCP to the Company for any services provided by the
Company to HCP, including the services of the Principals, is offset against
amounts payable to HCP.

Subject to other contractual limitations, the Management Agreement does not
prevent HCP from acting as an investment advisor or manager for any other
person, firm or corporation. The term of the Management Agreement continues
until December 31, 1999 and thereafter is automatically renewed for successive
one-year periods unless the Unaffiliated Directors (as defined therein) resolve
to terminate the Management Agreement.

The Formation Transactions

In connection with the Company's initial public offering, the Company
acquired a 97% ownership interest (representing 100% of the non-voting preferred
stock) in HCP and its wholly-owned subsidiaries, Hanover

14
<PAGE> 17

Capital Mortgage Corporation ("HCMC") and Hanover Capital Securities, Inc.
("HCS") in exchange for an aggregate of 716,667 shares of the Company's common
stock issued to the Principals. The Principals may also be issued up to 216,667
additional shares of common stock as additional payment for their contribution
of the preferred stock of HCP to the Company (the "Earn-Out"). The Earn-Out may
vest in full or in part on any September 30 beginning with September 30, 1998
and ending with September 30, 2002 (each, an "Earn-Out Measuring Date"). The
Earn-Out will vest in full as of any Earn-Out Measuring Date through which the
return on a unit offered in the Company's initial public offering is at least
equal to the initial public offering price of the unit. One-third of the
Earn-Out will vest as of any Earn-Out Measuring Date through which the return on
a unit is at least equal to a 20% annualized return on the initial public
offering price of the unit. The return on a unit is determined by adding (i) the
appreciation in the value of the unit since the closing of the initial public
offering and (ii) the amount of distributions made by the Company on the share
of common stock included in the unit since the closing of the initial public
offering. The appreciation in the value of a unit as of any Earn-Out Measuring
Date is the average difference, during the 30 day period that ends on the Earn-
Out Measuring Date, between the market price of the shares of common stock
included in the unit and the initial public offering price of the unit
multiplied by two to take into account the value of the warrant included in the
unit. In determining whether the Earn-Out has vested, appropriate adjustments
will be made for stock splits, recapitalizations, stock dividends and
transactions having similar effects.

In addition, up to $1,750,000 in loans made by the Company to the
Principals to enable the Principals to pay taxes will be forgiven to the extent
that the Earn-Out vests. These loans are secured by 116,667 shares of the
Principal's common stock of the Company but are otherwise nonrecourse to the
Principals.

The shares of common stock acquired by the Principals (including any
additional shares to be issued upon the vesting of the Earn-Out) and the
forgiveness of any loans to the Principals upon the vesting of the Earn-Out
represent the consideration given to the Principals in exchange for their
contribution of the preferred stock of HCP to the Company.

Although the Company owns all of the preferred stock of HCP, the Company
generally has no right to control the affairs of HCP, HCMC and HCS (other than
to approve certain fundamental transactions such as mergers, consolidations,
sales of substantially all assets, and voluntary liquidations) because the
preferred stock of HCP is nonvoting. Instead, as the holders of all of the
common stock of HCP, the Principals control the operations and affairs of HCP,
HCMC and HCS. This ownership is required because, as a real estate investment
trust, the Company generally may not own more than ten percent (10%) of the
voting securities of any other issuer.

Employment Agreements

On September 19, 1997, the Company entered into employment agreements with
the CEO, John A. Burchett, and the Company's three most senior executive
officers (Irma N. Tavares, Joyce S. Mizerak, and George J. Ostendorf). Each
employment agreement provides for an initial term of five years and will be
automatically extended for an additional year at the end of each year of the
employment agreement, unless either party provides prior written notice to the
contrary or the employee has been terminated pursuant to the terms thereof. The
employment agreements provide for an initial annual base salary of $300,000,
$225,000, $225,000, and $225,000 for Mr. Burchett, Ms. Mizerak, Ms. Tavares and
Mr. Ostendorf (each, a "Principal"), respectively. Each employment agreement
also provides for participation by the executive officer in the Company's Bonus
Incentive Compensation Plan and the Company's Stock Option Plan. Each employment
agreement also contains a not to compete provision which prohibits the executive
officer from competing with the Company for a certain period of time following
the Company's termination of the executive officer pursuant to each employment
agreement for "good cause" upon (i) the conviction of the executive officer of
(or the plea by the executive officer of nolo contendere to) a felony; (ii) the
good faith determination by the
15
<PAGE> 18

Board of Directors that the executive officer has willfully and deliberately
failed to perform a material amount of his or her executive officer's duties
pursuant to the employment agreement (other than a failure to perform duties
from the executive officer's incapacity due to physical or mental illness),
which failure to perform such duties shall not have been cured within thirty
(30) days after the receipt by the executive officer of written notice thereof
from the Board of Directors specifying with reasonable particularity such
alleged failure; (iii) any absence from the Company's regular full-time
employment in excess of three consecutive days that is not due to a vacation,
participation in a permitted activity, bona fide illness, disability, death or
other reason expressly authorized by the Board of Directors in advance; or (iv)
any act or acts of personal dishonesty (including, without limitation, insider
trading or unauthorized trading in the Company's securities) by the executive
officer which may have a material adverse effect on the Company or any of its
subsidiaries.

In addition, in the event the executive officer is terminated by the
Company without good cause or the executive officer resigns from the Company
within ninety days after being removed from, or not re-elected to the Board of
Directors, despite the executive officer's efforts to remain on the Board of
Directors, the executive officer will be entitled to receive his or her base
salary then in effect until the later of one year from the date of termination
or to the end of the term of the employment agreement. In the event that the
executive officer is terminated without good cause within ninety days after a
change of control (as defined in the employment agreement), then the executive
officer will be entitled to receive his or her base salary then in effect until
the later or two years from the date of termination or to the end of the term of
the employment agreement. The employment agreement also provides each executive
officer specified amounts of term life and disability insurance coverage, a
monthly automobile allowance and payment of club dues.

The HCP Shareholders' Agreement

HCP and the Principals entered into a shareholders' agreement (the "HCP
Shareholders' Agreement") that governs, among other things, (i) the rights of
the Principals to transfer their shares of common stock of HCP, and (ii) the
purchase of shares of common stock of HCP from the Principals by HCP, the
Company and the other Principals. Under the HCP Shareholders' Agreement, a
Principal may not transfer his or her shares of common stock of HCP, other than
to a family member, an affiliate or another HCP stockholder without first
offering such common stock of HCP to HCP, the other holders of common stock of
HCP, and the holders of preferred stock of HCP (in that order) on the same terms
and conditions. In addition, HCP, the other holders of common stock of HCP, and
holders of preferred stock of HCP, will have the right to purchase the shares of
common stock of HCP of a Principal (or of a permitted transferee of a Principal)
if such Principal (a) ceases to be employed by the Company (including by death,
disability or voluntary or involuntary termination), (b) ceases to own any
equity interest in the Company, (c) becomes bankrupt, or (d) transfers any
shares of common stock of HCP, in connection with a divorce or by operation of
law. The amount payable to a Principal who suffers any of the foregoing events
is based upon the valuation of HCP. To avoid the loss of the Company's status as
a real estate investment trust, the Company is permitted to assign its rights to
purchase common stock of HCP, and to exchange any common stock of HCP it
purchases for shares of nonvoting common stock of HCP.

Loans to the Principals

In connection with the Company's initial public offering, the Company
agreed to make up to $1,750,000 in loans available to the Principals to enable
them to pay their personal income taxes. Each loan has a term of five years and
bears interest at the lowest "applicable federal rate" in effect for the month
in which the loan was made. No payments of principal on the loans is due before
maturity unless the borrowing Principal is terminated for "good cause" under his
or her employment agreement with the Company, in which case the loan will become
immediately due and payable. Interest, however, is payable on a quarterly basis
in arrears.

16
<PAGE> 19

The loans to the Principals are secured by a maximum of 116,667 of their shares
of the Company's common stock (if the entire $1,750,000 was borrowed) but are
otherwise nonrecourse to them. A Principal will not be able to sell the shares
of common stock that are pledged to secure his or her loan. Accordingly, if a
Principal defaults in repaying his or her loan, the Company will be able to look
only to the shares of common stock the Principal pledged to secure his or her
loan and not to any personal assets of the Principal. Thus, a decline in the
value of the common stock could result in a Principal's failure to repay his or
her loan. As additional consideration to the Principals for their contribution
of the preferred stock of HCP to the Company, the outstanding balance of the
loans will be forgiven to the extent that the Earn-Out vests. The terms of the
loans were not determined through arm's-length negotiations and may be more
favorable to the Principals than would otherwise be available to them.

On September 19, 1997, the following Principals received loans from the
Company:

<TABLE>
<S> <C>
John A. Burchett:......................................... $270,000
Irma N. Tavares:.......................................... $104,600
Joyce S. Mizerak:......................................... $108,000
--------
Total:.......................................... $482,600
</TABLE>

17
<PAGE> 20

PERFORMANCE GRAPH

The following graph presents a total return comparison of the Company's
common stock, since the Company's initial public offering on September 16, 1997
(the date the units consisting of common stock and warrants commenced trading)
through December 31, 1997, to the S&P Composite-500 Stock Index and an index
average of the Company's peer group, composed of comparable publicly-traded
companies, in each case for the period commencing on September 16, 1997 through
December 31, 1997. The peer group includes Imperial Credit Mortgage Holdings,
Inc., Capstead Mortgage Corporation, Dynex Capital, INMC Mortgage Holdings,
Thornburg Mortgage Asset Corporation and Redwood Trust, Inc. The total returns
reflect stock price appreciation and the value of dividends for the Company's
common stock for each of the comparative indices. The graph assumes $100
invested on September 16, 1997, in the Company's units, the S&P 500 Stock Index
and the stock index of the peer group. The data source for the peer group is
FactSet Research Systems. The total return performance shown on the graph is not
necessarily indicative of future total return performance of the Company's
common stock.

[GRAPH OMITTED]

<TABLE>
<CAPTION>
Hanover
Capital
Measurement Period Mortgage
(Fiscal Year Covered) Holdings, Inc. S&P 500 Peer Group
<S> <C> <C> <C>
9/16/97 100.00 100.00 100.00
9/30/97 104.58 100.23 99.30
10/31/97 108.78 96.88 94.03
11/28/97 103.82 101.36 92.63
12/31/97 101.78 103.10 85.57
</TABLE>

18
<PAGE> 21

RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS

The Board of Directors of the Company has selected and appointed Deloitte &
Touche LLP to act as the Company's independent accountants for the year ended
December 31, 1998. In recognition of the important role of the independent
accountants, the Board of Directors has determined that its selection of such
accountants should be submitted to the stockholders for review and ratification
on an annual basis.

The affirmative vote of a majority of the shares voting on this proposal is
required for its adoption. In view of the difficulty and the expense involved in
changing independent accountants on short notice, if the proposal is not
approved, it is contemplated that the appointment for 1998 may be permitted to
stand, unless the Board of Directors finds other compelling reasons for making a
change. Disapproval of this proposal will be considered as advice to the Board
of Directors to select other independent accountants for the following year.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting and will have the opportunity to make a statement if they desire
to do so. They will also be available to respond to appropriate questions.

COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons owning more than 10% of a
registered class of the Company's securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10% holders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company during the fiscal year which ended December 31,
1997, all Section 16(a) filing requirements applicable to its officers,
Directors and greater than 10% beneficial owners were satisfied by such persons.

STOCKHOLDERS' PROPOSALS

Stockholders' proposals intended to be presented at the Company's next
Annual Meeting of Stockholders to be held in 1999 must be received at the
Company's principal executive offices no later than December 25, 1998 in order
to be considered for inclusion in the proxy statement and form of proxy related
to that meeting.

OTHER BUSINESS

The Board of Directors knows of no other matter to be acted upon at the
meeting. However, if any other matter shall properly come before the meeting,
the proxyholders named in the proxy accompanying this Proxy Statement will have
discretionary authority to vote all proxies in accordance with their best
judgment.

By order of the Board of Directors

Joyce S. Mizerak,
Managing Director, Director and
Secretary

April 24, 1998

19
<PAGE> 22

SKU#-HCMUN-PS-97

20
<PAGE> 23

PLEASE MARK YOUR
[X] VOTES AS IN THIS
EXAMPLE.

<TABLE>
<S> <C>
======================================================== 1. Election of Directors.
HANOVER CAPITAL MORTGAGE HOLDINGS, INC. FOR ALL WITH- FOR ALL
======================================================== GEORGE J. OSTENDORF ROBERT CAMPBELL NOMINEES HELD EXCEPT
JOHN NICHOLAS REES JOHN A CLYMER [ ] [ ] [ ]
JOSEPH FREEMAN SALYID NAQVI

Mark box at right if an address change or comment has NOTE: If you do not wish your shares voted "For" a particular
been noted on the reverse side of this card. nominee, mark the "For All Except" box and strike a line through the
name(s) of the nominee(s). Your shares will be voted for the
remaining nominee(s).
FOR AGAINST ABSTAIN
RECORD DATE SHARES: 2. Ratification of the appointment of [ ] [ ] [ ]
Deloitte and Touche LLP as independent
auditors of the Company.

3. In their discretion, the proxies are authorized to vote upon any
other business that may properly come before the meeting or at any
adjournment(s) thereof.

----------------------
Please be sure to sign and date this Proxy. Date
- ---------------------------------------------------------------------

- ---Stockholder sign here------------------------Co-owner sign here---

DETACH CARD DETACH CARD
</TABLE>

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

Dear Stockholder,

Please take note of the important information enclosed with this Proxy.
There are a number of issues related to the management and operation of
your Company that require your immediate attention and approval. These are
discussed in detail in the enclosed proxy materials.

Your vote counts, and you are strongly encouraged to exercise your right to
vote your shares.

Please mark the boxes on this proxy card to indicate how your shares will
be voted, then sign the card, detach it and return your proxy vote in the
enclosed postage paid envelope.

Your vote must be received prior to the Annual Meeting of Stockholders on
May 21, 1998.

Thank you in advance for your prompt consideration of these matters.

Sincerely,

Hanover Capital Mortgage Holdings, Inc.
<PAGE> 24
HANOVER CAPITAL MORTGAGE HOLDINGS, INC.
90 WEST STREET, SUITE 1508
NEW YORK, NEW YORK 10006

Annual Meeting of Stockholders -- MAY 21, 1998
Proxy Solicited on Behalf of the Board of Directors

The undersigned, revoking all prior proxies, hereby appoints John A. Burchett
and Joyce S. Mizerak as Proxies, with full power of substitution to each, to
vote for and on behalf of the undersigned at the 1998 Annual Meeting of
Stockholders of HANOVER CAPITAL MORTGAGE HOLDINGS, INC. to be held at the
American Stock Exchange, 86 Trinity Place, New York, New York, on Thursday, May
21, 1998 at 11:00 a.m., and at any adjournment or adjournments thereof. The
undersigned hereby directs the said proxies to vote in accordance with their
judgment on any matters which may properly come before the Annual Meeting, all
as indicated in the Notice of Annual Meeting, receipt of which is hereby
acknowledged, and to act on the following matters set forth in such notice as
specified by the undersigned.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED
"FOR" PROPOSALS 1 AND 2.

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PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
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Please sign exactly as your name(s) appear(s) on the books of the Company. Joint owners should each sign personally. Trustees and
other fiduciaries should indicated the capacity in which they sign, and where more than one name appears, a majority must sign. If
a corporation, this signature should be that of an authorized officer who should state his or her title.
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HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?

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