An agreement between a
borrower and a
lender where by the borrower pledges
asset as
collateral on a
loan without the
lender taking possession of the collateral. It especially applies to
mortgages; the
borrower hypothecates when he/she pledges the house as collateral for
payment of the mortgage, or he/she may hypothecate the mortgage in order to borrow against the
value of the house. In both situations, the borrower retains possession of the house, but the lender has the right to take possession if the borrower does not
service the debt. Hypothecation agreements also occur in
trading; a
broker will allow an
investor to borrow
money in order to purchase
securities with those securities as collateral. The investor
owns the securities, but the broker may take them if the debt is not serviced or if the value of the securities falls below a certain level. See also:
Foreclosure,
Margin account.