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Jump to: navigation, search This article is about debt financing. For the ring-fencing of a tax, see Hypothecation (taxation). See also: hypothec Hypothecation is the practice where a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral, but it is "hypothetically" controlled by the creditor in that he has the right to seize possession if the borrower defaults. A common example occurs when a consumer enters into a mortgage agreement, in which the consumer's house becomes collateral until the mortgage loan is paid off. The detailed practice and rules regulating hypothecation vary depending on context and on the jurisdiction where it takes place. In the US, the legal right for the creditor to take ownership of the collateral if the debtor defaults is classified as a lien. Rehypothecation is a practice that occurs principally in the financial markets, where a bank or other broker-dealer reuses the collateral pledged by its clients as collateral for its own borrowing.
Contents
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1 Hypothecation in consumer and business finance 2 No creditor's duty of care in India 3 Hypothecation in the investment markets 4 Rehypothecation o 4.1 Rehypothecation in repo agreements 5 See also 6 Notes and references 7 External links
goods and business equipment can be bought on credit agreements involving hypothecation the goods are legally owned by the borrower, but once again the creditor can seize them if required.
[edit] Rehypothecation
Goldman Sachs Tower banks that provide prime brokerage services are able to expand their trading operations by re-using collateral belonging to their counter-parties.
Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowing. In the UK, there is no limit on the amount of a clients assets that can be rehypothecated,[3] except if the client has negotiated an agreement with their broker that includes a limit or prohibition. In the US, re-hypothecation is capped at 140% of a client's debit balance.[4][5][6] In 2007, rehypothecation accounted for half the activity in the shadow banking system. Because the collateral is not cash it does not show up on conventional balance sheet accounting. Before the Lehman collapse, the International Monetary Fund (IMF) calculated that US banks were receiving over $4 trillion worth of funding by rehypothecation, much of it sourced from the UK where there are no statutory limits governing the reuse of a client's collateral. It is estimated that only $1 trillion of original collateral was being used, meaning that collateral was being rehypothecated several times over, with an estimated churn factor of 4.[5] Following the Lehman collapse, large hedge funds in particular became more wary of allowing their collateral to be rehypothecated, and even in the UK they would insist on contracts that limit the amount of their assets that can be reposted, or even prohibit rehypothecation completely. In 2009 the IMF estimated that the funds available to US banks due to rehypothecation had declined by more than half to $2.1 trillion - due to both less original collateral being available for rehypothecation in the first place and a lower churn factor.[5][6] The possible role of rehypothecation in the financial crisis of 20072010 and in the shadow banking system was largely overlooked by the mainstream financial press, until Dr. Gillian Tett of the Financial Times drew attention in August 2010 [6] to a paper from Manmohan Singh and James Aitken of the International Monetary Fund which examined the issue.[5]
California Civil Code Section;2920. (a) A mortgage is a contract by which specific property,including an estate for years in real property, is hypothecated for the performance of an act, without the necessity of a change of possession.(above article is hearsay)