what is hypothecation 
hypothecation occurs when an asset is pledged as collateral to secure a loan the owner of the asset does not give up title possession or ownership rights such as income generated by the asset however the lender can seize the asset if the terms of the agreement are not met hypothecation is different from a mortgage lien or assignment 1investopedia yurle villegashypothecation in mortgageshypothecation occurs most commonly in mortgage lending a mortgage is a type of loan that s secured by an underlying property the borrower technically owns the house but because the house is pledged as collateral the mortgage lender has the right to seize the house if the borrower cannot meet the repayment terms of the loan agreement which occurred during the foreclosure crisis 2auto loans are similarly secured by the underlying vehicle unsecured loans on the other hand do not work with hypothecation because there is no collateral to claim in the event of default as hypothecation provides security to the lender because of the collateral pledged by the borrower it is easier to secure a loan and the lender may offer a lower interest rate than on an unsecured loan though lenders cannot claim collateral for unsecured loans in default they can pursue other debt collection actions including a creditor lawsuit hypothecation in investingmargin lending in brokerage accounts is another common form of hypothecation when an investor trades on margin they re borrowing money from the brokerage to do so this can allow them to leverage their existing account balances to make larger investments and potentially net larger profits on the sale of securities this type of hypothecation can be risky however when an investor chooses to buy on margin or sell short they are agreeing that those securities can be sold if necessary if there is a margin call the investor owns the securities in their account but the broker can sell them if they issue a margin call that the investor cannot meet to cover the investor s losses 3this can be costly for the investor because it can amplify losses well beyond the initial investment made for that reason it s important to understand how margin trading works and what hypothecation could mean for you on a personal level examples of hypothecation agreementhypothecation in real estate is most often associated with mortgage loans a rental property for example may undergo hypothecation as collateral against a mortgage issued by a bank while the property remains collateral the bank has no claim on rental income that comes in however if the landlord defaults on the loan the bank may seize the property by initiating a foreclosure proceeding the use of hypothecation in real estate agreements can offer some reassurance to lenders who may want to mitigate risk when loaning money if the borrower doesn t pay for any reason the bank can potentially recoup some of its losses if it s able to foreclose and then resell the property later in that sense hypothecation aids in stabilizing the mortgage lending industry hypothecation can also work in favor of borrowers by entering into this type of agreement borrowers may find it easier to obtain mortgage loans with a smaller down payment or lower credit score requirements they may also be able to qualify for more favorable interest rates because the lender is assuming less risk foreclosure can be exceptionally damaging to your credit scores so if you re struggling with mortgage payments it may be helpful to reach out to your lender to discuss possible solutions hypothecation in commercial real estatehypothecation in commercial real estate is the same as it is in residential real estate lending the borrower posts collateral in order to secure a loan so again an investor who s borrowing to purchase a rental property such as an apartment building or duplex would use the property itself as collateral for the loan construction loans in commercial real estate work a little differently because the property that would otherwise serve as collateral has yet to be built the borrower would need to provide other property as substitute collateral the same rule however would apply with regard to default if the borrower fails to pay the loan the lender could claim ownership of the collateral 