Hypothecation

Hypothecation is the pledging of securities or other assets to secure a loan without actually transferring possession of the security used as collateral. This is the opposite of modern mortgages where the bank actually takes possession of the home until it is paid off. With hypothecation, if the borrower cannot meet his debt obligations then the lender has the right to seize the collateral and sell it to meet the amount of the outstanding debt. Rehypothecation is when a security is pledged to an institution and later re-pledged by that institution to meet one of its own collateral requirements to a third party.

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