EXCHANGE AGREEMENT

Exhibit 2.5

EXECUTION VERSION

EXCHANGE AGREEMENT

DATED AS OF SEPTEMBER 30, 2008,

BETWEEN

HANOVER CAPITAL MORTGAGE HOLDINGS, INC.

AND

TABERNA PREFERRED FUNDING I, LTD.

TABLE OF CONTENTS

          EXCHANGE AGREEMENT, dated as of September 30, 2008 (this “ Agreement ”), between Hanover Capital Mortgage Holdings, Inc., a Maryland corporation (“ Hanover ”), and Taberna Preferred Funding I, Ltd. (the “ Seller ”).

W I T N E S S E T H :

          WHEREAS, the Seller owns all of the Preferred Securities (as defined in the Trust Agreement (defined below)), representing undivided beneficial interests in the assets of Hanover Statutory Trust I (the “ Trust ”), each having a Liquidation Amount of $1,000, and having an aggregate Liquidation Amount of $20,000,000, provided for in that certain Amended and Restated Trust Agreement among Hanover, JPMorgan Chase Bank, N.A., as property trustee (the “ Property Trustee ”), Chase Bank USA, N.A., as Delaware trustee (the “ Delaware Trustee ”) and the administrative trustees named therein (the “ Administrative Trustees ”), dated as of March 15, 2005 (the “ Trust Agreement ” and such beneficial interests in the Trust, the “ Preferred Securities ”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Trust Agreement;

          WHEREAS, concurrently with the execution of this Agreement, Walter Industries, Inc. (“ Walter ”), JWH Holding Company, LLC (“ JWH ”), and Hanover are entering into an Agreement and Plan of Merger, dated as of the date hereof (as amended, supplemented, restated or otherwise modified from time to time, the “ Merger Agreement ”) pursuant to which, among other things, JWH will merge into Hanover (the “ Merger ”), the separate existence of JWH shall cease and Hanover shall continue as the surviving corporation and, except as otherwise provided in the Merger Agreement, shares of common stock of Hanover, par value $0.01 per share (the “ Common Stock ”), issued and outstanding immediately prior to the date and time at which the Merger shall become effective (the “ Merger Effective Time ”) shall be combined into fully paid and non-assessable shares of common stock of the surviving corporation (“ Surviving Corporation Common Stock ”) at the rate specified in the Merger Agreement; and

          WHEREAS, the parties hereto desire to make certain representations, warranties, covenants and agreements in connection with the Exchange (as defined in Section 2.1) and also to prescribe certain conditions to the Exchange.

          NOW, THEREFORE, in consideration of the representations, warranties, covenants, agreements and conditions hereafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I

DEFINED TERMS

          As used in this Agreement, the following terms have the meanings ascribed thereto:

          “Affiliate” shall mean, with respect to any specified Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with, such specified Person. For purposes of this definition, “control” (including, with correlative meanings, the

terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by Contract or otherwise.

          “Agreement” shall mean this Agreement, together with all exhibits attached hereto.

          “Amster Agreement” shall mean the Exchange Agreement by and among Hanover, Amster Trading Company and Ramat Securities, LTD dated as of the date hereof.

          “Claim” shall have the meaning ascribed to it in the Release.

          “Confidentiality Agreement” shall have the meaning ascribed to it in Section 5.1.

          “Contract” shall mean any written loan or credit agreement, note, bond, debenture, indenture, mortgage, guarantee, deed of trust, lease, franchise, permit, authorization, license, contract, instrument, employee benefit plan or practice or other binding agreement, obligation, arrangement, understanding or commitment.

          “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, together with the rules and regulations of the SEC promulgated thereunder.

          “Governmental Authority” shall mean any nation or government or any agency, public of regulatory authority, instrumentality, department, commission, court, arbitrator, ministry, tribunal or board of any nation or government or political subdivision thereof, in each case, whether foreign or domestic and whether national, supranational, federal, tribal, provincial, state, regional, local or municipal.

          “Hanover Releasee” shall have the meaning ascribed to it in the Release.

          “Law” means applicable statutes, common laws, rules, regulations, codes, licensing requirements, judgments, injunctions, writs, decrees, licenses, ordinances, authorizations, permits, certificates, easements, variances, exemptions, consents, orders, franchises, approvals, governmental guidelines, standards or interpretations having the force of law, rules and bylaws, in each case, of or administered by a Governmental Authority.

          “Lien” shall mean, with respect to any property or asset, any mortgage, easement, lien, pledge (including any negative pledge), charge, option, right of first or last refusal or offer, security interest or encumbrance of any kind in respect of such property or asset.

          “Person” shall mean a natural person, corporation, limited liability company, partnership, limited partnership or other entity, including a Governmental Authority.

          “Release” shall have the meaning ascribed to it in Section 2.3.

          “SEC” shall mean the U.S. Securities and Exchange Commission.

          “Securities Act” shall mean the Securities Act of 1933, as amended, together with the rules and regulations of the SEC promulgated thereunder.

          “Seller Releasor” shall have the meaning ascribed to it in the Release.

          “Subsidiaries” shall mean, with respect to any Person, another Person (i) of which 50% or more of the capital stock, voting securities, other voting ownership or voting partnership interests having voting power under ordinary circumstances to elect directors or similar members of the governing body of such corporation or other entity (or, if there are no such voting interests, 50% or more of the equity interests) are owned or controlled, directly or indirectly, by such first Person or (ii) of which such first Person is a general partner.

ARTICLE II

THE TRANSACTION

          Section 2.1 The Exchange . Subject to the terms and conditions of this Agreement, immediately prior to the Merger Effective Time, Seller hereby agrees to sell, transfer, assign, convey and deliver to Hanover, and Hanover hereby agrees to acquire from Seller, all of the Preferred Securities owned by Seller free and clear of all Liens (the “ Seller’s Preferred Securities ”) in exchange for an aggregate cash payment by Hanover of $2,250,000 (the “ Exchange ”), of which $250,000 is being paid to Seller by Hanover (the “ Initial Payment ”) simultaneously with the execution and delivery of this Agreement by Seller by wire transfer of immediately available funds to the Taberna Account (as hereinafter defined). The Initial Payment is being paid to Seller in consideration of Seller entering into this Agreement and shall be considered fully-earned by Seller and non-refundable immediately upon execution and delivery of this Agreement.

          Section 2.2 Closing . A closing of the Exchange (the “ Closing ”) shall be held substantially concurrently with the closing of the Merger (the “ Closing Date ”); provided that all conditions set forth in Article VI (other than those conditions that by their nature are to be satisfied or waived at the Closing, but subject to the satisfaction or waiver of those conditions) are satisfied or waived.

          Section 2.3 Delivery by Seller of Preferred Securities; Release . At the Closing, Seller shall: (i) surrender for transfer the Preferred Securities Certificate(s) representing the Seller’s Preferred Securities duly endorsed and accompanied by a written instrument of transfer in form satisfactory to the Securities Registrar and to Hanover, duly executed by Seller and accompanied (to the extent required by the Property Trustee) by a certificate of Hanover substantially in the form of Exhibit E to the Trust Agreement; (ii) take (or shall have taken, to the extent prior action is required) (A) all other actions required pursuant to the Trust Agreement or as reasonably requested by Hanover, the Administrative Trustees or the Property Trustees to cause one or more of the Administrative Trustees to execute and deliver to the Property Trustee, and to cause the Property Trustee to authenticate and deliver, in the name of Hanover, one or more new Preferred Securities Certificates in authorized denominations of an aggregate Liquidation Amount equal to that of the Seller’s Preferred Securities, as may be required by the Trust Agreement, dated the Closing Date, by such Administrative Trustee or Trustees, all as

described in Section 5.7(b) of the Trust Agreement and (B) at the request of Hanover, all such reasonable actions as may be necessary and appropriate to cause the cancellation of the Preferred Securities; (iii) take all other actions as may be necessary and appropriate to vest in Hanover good and marketable title to the Preferred Securities free and clear of any and all Liens; and (iv) deliver to Hanover, the Trustees and the Note Trustee a duly executed original counterpart of a Release and Waiver in the form of Exhibit A hereto (the “ Release ”).

          Section 2.4 Payment of Cash; Release . At the Closing, in consideration of Seller’s delivery of the Preferred Securities, Hanover will: (i) make payment to Seller of $2,000,000 by wire transfer of immediately available funds to the following account (the “ Taberna Account ”):

The Bank of New York
ABA #: 021-000-018
GL A/C #: 211705
BENE NAME: BNY ABS/MBS
FFC TAS #: 225962
REF: TABERNA FUNDING CAPITAL TRUST I
ATT: MUDASSIRMOHAMED

and (ii) deliver to Seller, the Trustees and the Note Trustee a duly executed original counterpart of the Release.

          Section 2.5 Forbearance . In exchange for the valuable consideration set forth above and other valuable consideration, the receipt and adequacy of which are herein acknowledged, and notwithstanding anything to the contrary in the Preferred Securities, the Trust Agreement, the Indenture, any other agreement to which Seller and Hanover are parties, or applicable law, prior to the earlier to occur of (i) the termination of this Agreement pursuant to Section VII hereof or (ii) the date upon which Hanover becomes subject to bankruptcy or similar insolvency proceedings, Seller agrees, on behalf of itself and the Seller Releasors, to forbear from making any Claims against any Hanover Releasee arising out of or in connection with the Trust Agreement, Indenture or the Seller’s Preferred Securities, whether arising in equity or pursuant to any law, rule or regulation, including any Claims of which Seller is not aware or does not suspect to exist as of the date on which Seller signs this Agreement; provided , that nothing in this Section 2.5 shall be construed to prevent Seller from fulfilling its obligations hereunder, including pursuant to Sections 2.3 and 5.6 hereof. For the avoidance of doubt and without limitation, the foregoing shall prevent Seller and the Seller Releasors from making any Claim in respect of the occurrence and continuance of any Event of Default under the Trust Agreement (including, without limitation, any Note Event of Default) or any default under the Trust Agreement, the Preferred Securities or the Indenture during the term of this Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF HANOVER

          Hanover represents and warrants to Seller as follows:

          Section 3.1 Organization . Hanover is a corporation duly organized, validly existing and in good standing under the Laws of the State of Maryland.

          Section 3.2 Corporate Authority; No Violation, Etc . Hanover has the requisite corporate power and authority to enter into this Agreement and each agreement or instrument to be executed and delivered in connection with or pursuant hereto, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance by Hanover of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of Hanover. This Agreement has been duly executed and delivered by Hanover and, assuming due authorization, execution and delivery of this Agreement by Seller, constitutes a legal, valid and binding agreement of Hanover, enforceable against Hanover in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general application relating to or affecting creditors’ rights and to general equity principles. Neither the execution and delivery by Hanover of this Agreement, the consummation by Hanover of the transactions contemplated hereby nor compliance by Hanover with any of the provisions hereof (i) violates or conflicts with any provisions of Hanover’s charter or bylaws, (ii) requires any consent, approval, authorization or permit of, registration, declaration or filing with, or notification to, any Governmental Authority or any other Person, (iii) results in a default (or an event that, with notice or lapse of time or both, would become a default) or gives rise to any right of termination or buy-out by any third party, cancellation, amendment or acceleration of any obligation or the loss of any benefit under any Contract to which Hanover or any of its Subsidiaries is a party or by which Hanover or any of its Subsidiaries or any of their respective assets or properties is bound or affected, (iv) results in the creation of a Lien on any of the issued and outstanding shares of Common Stock or equity securities of any Subsidiary or on any of the assets of Hanover or its Subsidiaries or (v) violates or conflicts with any Law applicable to Hanover or any of its Subsidiaries, or any of the properties, businesses or assets of any of the foregoing, other than such exceptions in the case of each of clauses (ii), (iii), (iv) and (v) above as would not, individually or in the aggregate, reasonably be expected to materially impair or delay Hanover’s ability to perform each of its obligations hereunder and to consummate the transactions contemplated hereby.

          Section 3.3 Amster Agreement . Attached hereto as Exhibit B is a true and complete copy of the Amster Agreement as in force and effect on the date hereof. There is no other agreement between Hanover and either of Amster Trading Company or Ramat Securities, LTD with respect to the transactions contemplated by the Amster Agreement.

          Section 3.4 Disclaimer of Warranties . EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE III, HANOVER DOES NOT MAKE AND HAS NOT MADE ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, RELATING TO HANOVER OR ITS BUSINESSES. ALL SUCH OTHER

REPRESENTATIONS AND WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED BY HANOVER.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SELLER

          Seller represents and warrants to Hanover as follows:

          Section 4.1 Organization, Qualification, Etc . Seller is an exempted company incorporated in the Cayman Islands with limited liability.

          Section 4.2 Corporate Authority; No Violation, Etc . Seller has the requisite corporate power and authority to enter into this Agreement and each agreement or instrument to be executed and delivered in connection with or pursuant hereto, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance by Seller of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of Seller. This Agreement has been duly executed and delivered by Seller and, assuming due authorization, execution and delivery of this Agreement by Hanover, constitutes a legal, valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general application relating to or affecting creditors’ rights and to general equity principles. Neither the execution and delivery by Seller of this Agreement, the consummation by Seller of the transactions contemplated hereby nor compliance by Seller with any of the provisions hereof (i) violates or conflicts with any provisions of Seller’s [organizational documents], (ii) requires any consent, approval, authorization or permit of, registration, declaration or filing with, or notification to, any Governmental Authority or any other Person, (iii) results in a default (or an event that, with notice or lapse of time or both, would become a default) or gives rise to any right of termination or buy-out by any third party, cancellation, amendment or acceleration of any obligation or the loss of any benefit under any Contract to which Seller or any of its Subsidiaries is a party or by which Seller or any of its Subsidiaries or any of their respective assets or properties is bound or affected, (iv) results in the creation of a Lien on any of the issued and outstanding equity interests of Seller or on any of the assets of Seller or its Subsidiaries or (v) violates or conflicts with any Law applicable to Seller or any of its Subsidiaries, or any of the properties, businesses or assets of any of the foregoing, other than such exceptions in the case of each of clauses (ii), (iii), (iv) and (v) above as would not, individually or in the aggregate, reasonably be expected to materially impair or delay Seller’s ability to perform each of its obligations hereunder or to consummate the transactions contemplated hereby.

          Section 4.3 Ownership of Preferred Securities . Seller owns 20,000 Preferred Securities having an aggregate Liquidation Amount equal to $20,000,000. All of the Seller’s Preferred Securities are beneficially owned or owned of record by Seller, free and clear of all Liens. The consummation of the transactions contemplated by this Agreement will convey to Hanover good title to the Seller’s Preferred Securities, free and clear of all Liens, except for those created by Hanover or arising out of ownership of the Preferred Securities by Hanover and

other than restrictions on transfer of unregistered securities arising under applicable federal, state or foreign securities laws.

          Section 4.4 Ownership of Hanover Equity Securities . Seller represents and warrants that Seller does not own any equity securities of Hanover.

          Section 4.5 Disclaimer of Warranties . EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE IV, SELLER DOES NOT MAKE AND HAS NOT MADE ANY REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, RELATING TO SELLER OR ITS BUSINESSES. ALL SUCH OTHER REPRESENTATIONS AND WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED BY SELLER.

ARTICLE V

COVENANTS

          Section 5.1 Confidentiality . The parties hereto acknowledge that Seller and Hanover have previously executed a confidentiality agreement dated as of January 31, 2008, as amended and supplemented on August 5, 2008 (as it may be amended from time to time, the “ Confidentiality Agreement ”), which Confidentiality Agreement shall continue in full force and effect in accordance with its terms. Each of Seller and Hanover and their respective directors, officers, employees, Affiliates, controlling Persons, representatives or agents shall hold all information received from the other party in connection with this Agreement and the transactions contemplated hereby in confidence in accordance with the terms of the Confidentiality Agreement.

          Section 5.2 Public Disclosure . Except as required by Law (including federal and state securities Laws) or by the rules and regulations of any national securities exchange, no party to this Agreement shall issue or cause the publication of any press release or other public announcement or disclosure to any third party of the terms or conditions of this Agreement unless approved by Hanover and Seller prior to any such release, announcement or disclosure; provided that in all instances, Hanover and Seller shall consult with each other before issuing, and give each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by this Agreement. The initial press release to be issued with respect to the transactions contemplated by this Agreement shall be in the form heretofore agreed to by Hanover and Seller.

          Section 5.3 Expenses . All costs and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement (including costs of consultants and representatives) shall be borne by the party incurring such costs and expenses, except that Hanover will reimburse Seller for fees and disbursements of legal counsel engaged by Seller in connection with the transactions contemplated by this Agreement up to a maximum amount of $15,000 in the aggregate, whether or not the Closing occurs. Simultaneously with the execution and delivery of this Agreement and subject to the foregoing limitation, Hanover will reimburse Seller for all such fees and disbursements incurred as of the date hereof. Any additional fees and disbursements to be reimbursed hereunder, subject to the $15,000 aggregate maximum, shall be paid to Seller on the earlier to occur of (a) the Closing of the Merger and (b) the fifth day after

receipt of notice from Seller delivered after the termination of this Agreement in accordance with its terms, setting forth the amount thereof.

          Section 5.4 Standstill . From the date hereof until the earlier to occur of (i) the Merger Effective Time, (ii) the public announcement of the valid termination of the Merger Agreement, (iii) the Merger Agreement is validly terminated or (iv) the termination of this Agreement in accordance with its terms (the “ Standstill Period ”), neither the Seller nor any of its Affiliates will, directly or indirectly, unless invited to do so (on an unsolicited basis) by the Board of Directors of Hanover in writing or otherwise expressly permitted hereunder: (i) acquire, offer or propose to acquire, or agree or seek to acquire, by purchase or otherwise, any securities or direct or indirect rights or options to acquire any securities of Hanover or any Subsidiary thereof, or of any successor to or person in control of Hanover, or any assets of Hanover or any Subsidiary or division thereof or of any such successor or controlling person; (ii) enter into or agree, offer, propose or seek (whether publicly or otherwise) to enter into, or otherwise be involved in or part of, any acquisition transaction, merger or other business combination relating to all or part of Hanover or any of its Subsidiaries or any acquisition transaction for all or part of the assets of Hanover or any Subsidiary of Hanover or any of their respective businesses; (iii) make, or in any way participate in, any “solicitation” of “proxies” (as such terms are defined under Regulation 14A under the Exchange Act, disregarding clause (iv) of Rule 14a-1(1)(2) and including any otherwise exempt solicitation pursuant to Rule 14a-2(b)) to vote, or seek to advise or influence any person or entity with respect to the voting of, any voting securities of Hanover or any of its Subsidiaries; (iv) call or seek to call a meeting of the stockholders of Hanover or any of its Subsidiaries, nominate any person for election as a director of Hanover  or initiate any shareholder proposal for action by stockholders of Hanover or any of its Subsidiaries; (v) bring any action or otherwise act to contest the validity of this agreement or seek a release of the restrictions contained herein; (vi) form, join or in any way participate in a “group” (within the meaning of Section 13(d)(3) of the Exchange Act) with respect to any voting securities of Hanover or any of its Subsidiaries; (vii) seek, propose or otherwise act alone or in concert with others to influence or control the management, board of directors or policies of Hanover or any of its Subsidiaries; (viii) enter into any discussions, negotiations, arrangements or understandings with any other person with respect to any of the foregoing activities or propose any of such activities to any other person; (ix) advise, assist, encourage, act as a financing source for or otherwise invest in any other person in connection with any of the foregoing activities; or (x) disclose any intention, plan or arrangement inconsistent with any of the foregoing. The Seller will promptly advise Hanover of any inquiry or proposal made to the Seller with respect to any of the foregoing, including the terms thereof and the identity of any party making any such inquiry or proposal. During the Standstill Period, neither the Seller nor any of its Affiliates will, directly or indirectly: (a) request Hanover or its Representatives to (1) amend or waive any provision of this paragraph (including this sentence) or (2) otherwise consent to any action inconsistent with any provision of this paragraph (including this sentence); or (b) take any initiative with respect to Hanover or any of its Subsidiaries which could require Hanover to make a public announcement regarding (1) such initiative, (2) any of the activities referred to in the second preceding sentence or (3) the possibility of the Seller or any other person acquiring control of Hanover other than pursuant to the Merger, whether by means of a business combination or otherwise. Notwithstanding the foregoing, nothing in this Section 5.4 shall prevent the Seller from (i) voting any shares of Common Stock held or beneficially owned by Seller in favor of the Merger, the Merger Agreement and the transactions contemplated thereby

at any meeting of the stockholders of Hanover (including any adjournment or postponement thereof) and (ii) receiving consideration, if any (including, if and to the extent applicable, shares of Surviving Corporation Common Stock), in exchange for shares of Common Stock held by Seller in an amount and to the extent specifically provided therefor in the Merger Agreement. For the avoidance of doubt, the terms “securities” and “voting securities” of Hanover as used in this Section 5.4 shall include, without limitation, the Common Stock.

          Section 5.5 Amster Agreement . Hanover will not, without Seller’s prior written consent, amend, modify or supplement the Amster Agreement to increase the amount of cash or number of shares of common stock of Hanover payable for preferred securities thereunder; provided, that, to the extent that any increase in the number of shares of common stock of Hanover payable by Hanover under the Amster Agreement is solely attributable to any split, combination, reclassification or similar transaction in respect of the common stock of Hanover, such increase shall not be an increase in the amount of shares of common stock of Hanover payable thereunder for purposes of this Section 5.5.

          Section 5.6 Waiver of Events of Default . Seller shall use its commercially reasonable efforts to cause the Trustees and the Note Trustee to, until the earliest to occur of (i) the Closing, (ii) the termination of this Agreement in accordance with its terms or (iii) the valid termination of the Merger Agreement, waive any Event of Default (including any Note Event of Default that must be waived by the Note Trustee) and to refrain from accelerating any of Hanover’s obligations under the Trust Agreement or the Indenture, including, without limitation, by providing written instructions to the Trustees and the Note Trustee, in a form reasonably acceptable to Hanover, in advance of any anticipated Event of Default identified to Seller by Hanover in writing, instructing the relevant Trustees and the Note Trustee to waive such Event of Default and to refrain from accelerating any of Hanover’s obligations under the Trust Agreement and the Indenture and, in the case of any written instruction to any of the Trustees, to instruct the Note Trustee to so waive and refrain; provided that any such waiver may be limited to the duration of Seller’s obligation to use such commercially reasonable efforts hereunder.

          Section 5.7 Reasonable Efforts and Further Assurances . Subject to the limitations set forth elsewhere in this Agreement and to applicable Law, and provided that nothing herein shall require any party to waive any of the conditions set forth in Article VI, each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all action, and to do, or cause to be done, and to assist and cooperate with the other party hereto in doing, as promptly as practicable, all things necessary, proper or advisable under applicable Laws to (a) consummate and make effective the Exchange and the other transactions contemplated by this Agreement and (b) cause the Closing to take place at the time and place contemplated hereby. If at any time after the Closing Date any further action is necessary or desirable to carry out the purposes of this Agreement, including the execution of additional instruments, the proper officers and directors of each party to this Agreement shall take all such necessary action.

          Section 5.8 Termination of the Merger Agreement . Hanover will give Seller prompt written notice of any termination of the Merger Agreement.

ARTICLE VI

CONDITIONS TO CLOSING

          Section 6.1 Conditions to Each Party’s Obligations . The respective obligations of each party to this Agreement to consummate the Exchange and other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing Date of each of the conditions set forth in this Section 6.1:

               (a)  No Injunctions or Restraints; Illegality . No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other Governmental Authority of competent jurisdiction or other Law or legal restraint or prohibition preventing or making illegal the consummation of the transactions contemplated by this Agreement and the Merger Agreement shall be in effect; provided , however , that the parties hereto shall use their reasonable best efforts to have any such injunction, order, restraint or prohibition vacated.

               (b)  Regulatory Approvals . All consents, approvals and authorizations of any Governmental Authority required by Law for the consummation of the transactions contemplated by this Agreement shall have been obtained and be in full force and effect at the Closing, except those consents, approvals and authorizations the failure of which to obtain would not, individually or in the aggregate, reasonably be expected to materially impair or delay either party’s ability to perform each of its obligations hereunder and to consummate the transactions contemplated hereby.

               (c)  The Merger . Each of the conditions set forth in Article 8 of the Merger Agreement shall have been satisfied or waived (except for those conditions that, by the express terms thereof, are not capable of being satisfied until the Effective Time, but subject to the satisfaction or waiver of those conditions).

               (d) The closing of the transactions contemplated by the Amster Agreement shall have occurred or shall occur simultaneously with the Closing hereunder.

          Section 6.2 Additional Conditions to Obligations of Hanover . The obligation of Hanover to consummate the Exchange and each of the other transactions contemplated hereby shall be subject to the satisfaction or waiver at or prior to the Closing Date of each of the conditions set forth in this Section 6.2, any of which may be waived, in writing, by Hanover:

               (a)  Representations and Warranties . The representations and warranties of Seller in Article IV hereof shall be true and correct in all material respects on the date of this Agreement and at the Closing Date as if made on and as of the Closing Date, except to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date.

               (b)  Performance . Seller shall have performed and complied with in all material respects each agreement, covenant and obligation required by this Agreement to be so performed or complied with by it at or before the Closing pursuant to the terms hereof.

          Section 6.3 Additional Conditions to Obligations of Seller . The obligations of Seller to consummate the Exchange and each of the other transactions contemplated hereby shall be subject to the satisfaction or waiver at or prior to the Closing Date of each of the conditions set forth in this Section 6.3, any of which may be waived, in writing, by Seller:

               (a)  Representations and Warranties . The representations and warranties of Hanover in Article III hereof shall be true and correct in all material respects on the date of this Agreement and at the Closing Date as if made on and as of the Closing Date, except to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct as of such date.

               (b)  Performance . Hanover shall have performed and complied with in all material respects each agreement, covenant and obligation required by this Agreement to be so performed or complied with by it at or before the Closing pursuant to the terms hereof.

ARTICLE VII

TERMINATION

          Section 7.1 Termination . Notwithstanding anything herein to the contrary, this Agreement may be terminated at any time prior to the Closing Date:

               (a) by mutual written consent of Hanover and Seller;

               (b) by Hanover, if there has been a material violation or breach by the Seller of any covenant, agreement, representation or warranty contained in this Agreement which has rendered the satisfaction of any condition to the obligations of Hanover impossible, and such violation or breach has not been cured by Seller within twenty (20) days after Hanover delivers to Seller a written notice of such violation or breach;

               (c) by Seller, if there has been a material violation or breach by Hanover of any covenant, agreement, representation or warranty contained in this Agreement which has rendered the satisfaction of any condition to the obligations of Seller impossible, and such violation or breach has not been cured by Hanover within twenty (20) days after the Seller delivers to Hanover a written notice of such violation or breach;

               (d) by either party, if there has been a valid termination of the Merger Agreement; and

               (e) by Seller if the Closing has not occurred on or before March 1, 2009.

          Section 7.2 Procedure and Effect of Termination . In the event of termination of this Agreement and abandonment of the transactions contemplated hereby by the parties hereto pursuant to Section 7.1 hereof, written notice thereof shall be given by the party so terminating to the other party and this Agreement shall forthwith terminate and shall become null and void and of no further effect, and the transactions contemplated hereby shall be abandoned without further action by Hanover and Seller; provided , however , that the last sentence of Section 2.1 and all of Sections 5.1, 5.2 and 5.3, this Section 7.2 and Article VIII shall survive

termination of this Agreement. Notwithstanding anything to the contrary herein, no termination of this Agreement shall require Seller to return the Initial Payment. If this Agreement is terminated pursuant to Section 7.1 hereof:

               (a) Hanover shall redeliver, or cause to be redelivered, all documents, work papers and other materials of Seller relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same, and all confidential information received by Hanover or its directors, officers, employees, Affiliates, controlling Persons, representatives or agents with respect to Seller, shall be treated in accordance with the Confidentiality Agreement;

               (b) Seller shall redeliver, or cause to be redelivered, all documents, work papers and other materials of Hanover and any other party to the Merger Agreement and the Confidentiality Agreement relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same, and all confidential information received by Seller or its directors, officers, employees, Affiliates, controlling Persons, representatives or agents with respect to Hanover, shall be treated in accordance with the Confidentiality Agreement; and

               (c) all filings, applications and other submissions made pursuant to this Agreement, to the extent practicable, shall be withdrawn from the agency or other Person to which they were made or amended so to reflect the termination hereof.

ARTICLE VIII

MISCELLANEOUS

          Section 8.1 Notices . Any notices, demands, requests, consents or approvals required or permitted by this Agreement must be in writing and addressed to either party at the address set forth below, or at such other address as either party may designate from time to time in writing in accordance with this Section:

          If to Hanover, to:

Hanover Capital Mortgage Holdings, Inc.
200 Metroplex Drive, Suite 100
Edison, New Jersey 08817
Attention: General Counsel
Facsimile: (732) 548-0286

          with a copy (which shall not constitute effective notice) to:

Thacher Proffitt & Wood LLP
Two World Financial Center
New York, New York 10281

Attention: Mark I. Sokolow
Facsimile: (212) 912-7751

Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
Attention: Peter J. Gordon, Esq.
Facsimile: (212) 455-2502

          If to Seller:

Taberna Preferred Funding I, Ltd.
c/o Taberna Capital Management, LLC
450 Park Avenue, 11 ^th Floor
New York, New York 10022
Attention: Raphael Licht
Facsimile: (212) 735-1499

          With a copy (which shall not constitute effective notice) to:

Polsinelli Shalton Flanigan Suelthaus PC
Seven Penn Plaza, Suite 600
New York, New York 10001
Attention: Robert F. McDonough, Esq.
Facsimile: (212) 684-0197

          Notice is deemed given (a) when delivered, if delivered personally to the recipient, (b) when sent, if sent by facsimile with a copy of such facsimile sent to the recipient by reputable overnight courier service (charges prepaid) on the same day, (c) upon receipt, when mailed by registered or certified mail, return receipt requested, postage prepaid, or (d) one business day after being sent to the recipient, if sent by reputable overnight courier service (charges prepaid).

          Section 8.2 Non-Survival of Representations and Warranties . None of the representations, warranties, covenants and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Closing, except for those covenants and agreements contained herein and therein which by their terms apply in whole or in part after the Closing (including, without limitation, the release set forth in Section 2.5 hereof) and then only to such extent. The Confidentiality Agreement shall survive the execution and delivery of this Agreement and any termination of this Agreement, and the provisions of the Confidentiality Agreement shall apply to all information and material furnished by any party or its representatives thereunder or hereunder.

          Section 8.3 Interpretation . When a reference is made to an Article, Section, Schedule or Exhibit, such reference shall be to an Article, Section, Schedule or Exhibit of or to this Agreement unless otherwise indicated. Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation”. In the event an ambiguity or question of intent or interpretation arises, this

Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.

          Section 8.4 Amendments, Modification and Waiver . This Agreement, and the terms and provisions hereof, may not be modified, waived or amended except by an instrument or instruments in writing signed by the party or parties against whom enforcement of any such modification or amendment is sought (or, in the case of a waiver, by the intended beneficiary or beneficiaries of the waived term or provision).

          Section 8.5 Successors and Assigns; Binding Effect . Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned, directly or indirectly, including, without limitation, by operation of law, by any party hereto without the prior written consent of the other party hereto. Subject to the preceding sentence and notwithstanding anything to the contrary, this Agreement and all of the provisions hereof shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.

          Section 8.6 Governing Law . This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made and to be performed therein.

          Section 8.7 Jurisdiction; Forum .

               (a) Each Party irrevocably submits to the jurisdiction, including the personal jurisdiction, of (i) any New York State court sitting in New York County, and (ii) any Federal court of the United States sitting in New York County in the State of New York, solely for the purposes of any suit, action or other proceeding between any of the parties hereto arising out of this Agreement or any transaction contemplated hereby. Each Party agrees to commence any suit, action or proceeding relating hereto only in any Federal court of the United States sitting in New York County in the State of New York or, if such suit, action or other proceeding may not be brought in such court for reasons of subject matter jurisdiction, in any New York State court sitting in New York County. Each Party irrevocably and unconditionally waives any objection to the laying of venue of any suit, action or proceeding between any of the parties hereto arising out of this Agreement or any transaction contemplated