Hanover Capital Mortgage Holdings, Inc.

We primarily invest in subordinated (non-investment grade) residential mortgage-backed securities and, to a lesser extent, mortgage loans. Operating as a tax-advantaged REIT, we generally are not subject to Federal and state income taxes to the extent that we distribute our taxable earnings to our stockholders and maintain our qualification as a REIT. However, our operating subsidiary business segment Hanover Capital Partners 2, Ltd dba HanoverTrade, is subject to Federal and state income tax. We are required to pay dividends amounting to 85% of each year's taxable income and 95% of the portion of each year's capital gain net income that is not taxed at the REIT level by the end of each calendar year. Further, we must declare dividends amounting to 90% of our taxable income for each year by the time we file our Federal tax return. Therefore, as a REIT, we generally pass through substantially all of our earnings to shareholders without paying Federal income tax at the corporate level.