Hypothecation

Hypothecation

In banking, refers to the commitment of property to secure a loan.

In securities, refers to the commitment of securities to serve as collateral for margin loans at the broker-dealer firm.

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Hypothecate

To pledge an 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 the house, but the lender has the right to take possession if the borrower does not service the debt. Hypothecation also occurs in trading: a broker will allow an investor to borrow money 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.

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Hypothecation. Hypothecation means pledging an asset as collateral for a loan.

If you use a margin account to buy on margin or sell short, for example, you pledge securities (stocks, bonds, or other financial instruments) as collateral for the debt. If the brokerage firm issues a margin call that you don't meet, it can sell those securities to cover its losses.

Similarly, if you arrange a mortgage on your home, you give the lender the right to sell your home if you fail to meet your obligation to make mortgage payments.

Hypothecation may make it easier for you to secure a loan, but you do run the risk of losing the asset if for some reason you default on your obligation to repay according the terms of the agreement.