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.
A written agreement between a customer opening a margin account and a brokerage firm that pledges stock in the account as collateral for margin loans. The brokerage firm is permitted to sell the stock in the event that equity in the account falls below a stipulated level.