Business, Legal & Accounting Glossary
A collateralising arrangement in which neither the possession nor the title but only the right to sell an asset or property passes on to the creditor or lender (called a grantee). An arrangement where the grantee has the possession and right to sell, but not the title, is called pledging.
Hypothecation is the practice where a debtor pledges collateral to secure a debt or as a condition precedent to the debt, or a third party pledges collateral for the debtor.
A letter of hypothecation is the usual instrument for carrying out the pledge.
Hypothecation refers to pledging of securities for securing a loan. This kind of arrangement is a common feature in the mortgage business. In the mortgage industry, a borrower has legal ownership over property that has been offered as security. Lender, in exchange, gets a lien over collateral till credit is fully recovered. A broker may, in order to get a bank loan, pledge hypothecated securities owned by clients. This is known as rehypothecation.
In hypothecation, the lender does not own an asset or property that has been offered as collateral. But the lender has sole rights to sell an asset or property if a borrower fails to clear his or her dues.
Rehypothecation is the reuse of posted collateral. For example, if an institution receives collateral from a counterparty to secure an obligation, that institution may rehypothecate the collateral by lending it, repoing it, or posting it as collateral for one of its own obligations to a third party.
Rehypothecation is not permitted in some jurisdictions. It is common practice in the United States. Any collateral agreement should explicitly permit or not permit rehypothecation.
In the lending business, collateral provides security against defaulting borrowers. Collateral pledged by borrowers may be assets or properties. In case of default in repaying a loan, a lender will get complete ownership of pledged property or asset.
Mortgage refers to the pledging of property in exchange for a loan. If conditions of mortgage loans are fully satisfied by the borrower, then interest in land is transferred back to the borrower. Otherwise, the lender becomes the owner of the property.
Gasoline tax in the United States is an instance where the concept of hypothecation comes into play. In the US, gasoline tax receipts are hypothecated to transportation projects. Hence gasoline tax is also looked upon as a user fee. But in other countries, gasoline or fuel tax works as a source of revenue for the government.
In many European countries, a television license is obligatory for receiving television broadcasts. This is regarded as a hypothecation tax where funds are utilized for public broadcasting. This helps public broadcasters to broadcast programs without solely depending on revenues generated through commercials.
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This glossary post was last updated: 16th April, 2020 | 2 Views.