Editing Hypothec (section)

==Hypothecation and rehypothecation==
'''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.<ref>{{Cite web |title=What Is Hypothecation? – Forbes Advisor |url=https://www.forbes.com/advisor/mortgages/what-is-hypothecation/ |access-date=2023-07-27 |website=www.forbes.com}}</ref> A common example occurs when a debtor enters into a [[mortgage loan|hypothecary loan agreement]], in which the debtor's house becomes collateral until the hypothecary loan is paid off. The debtor retains ownership of the collateral, but the creditor has the right to seize ownership if the debtor defaults. The main purpose of hypothecation is to mitigate the creditor's credit risk. If the debtor cannot pay, the creditor possesses the collateral and therefore can claim its ownership, sell it and thus compensate the lacking cash inflows. In a default of the obligor without previous hypothecation, the creditor cannot be sure that it can seize sufficient assets of the debtor. Because hypothecation makes it easier to get the debt and potentially decreases its price; the debtor wants to hypothecate as much debt as possible{{snd}} but the isolation of 'good assets' for the collateral reduces the quality of the rest of the debtor's balance sheet and thus its credit worthiness. The detailed practice and rules regulatory ''hypothecation'' vary depending on context and on the jurisdiction where it takes place. Hypothecation is a common feature of consumer contracts involving mortgages{{snd}} the debtor legally owns the house, but until the mortgage is paid off, the creditor has the right to take ownership (and possibly also possession){{snd}} but only if the debtor fails to keep up with repayments.<ref name = "dictdef">{{cite web
  |url= http://financial-dictionary.thefreedictionary.com/Hypothecation
  |title= Hypothecation explained at the financial dictionary
  |accessdate=2010-08-31}}
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If a consumer takes out an additional loan secured against the value of his hypothec (known colloquially as a "second hypothec", for up to approximately the current value of the house minus outstanding repayments) the consumer is then hypothecating the hypothec itself{{snd}} the creditor can still seize the house but in this case the creditor then becomes responsible for the outstanding hypothecary debt. Sometimes consumer goods and business equipment can be bought on credit agreements involving hypothecation{{snd}} the goods are legally owned by the borrower, but once again the creditor can seize them if required.

'''Rehypothecation''' occurs when entities re-use the collateral to secure their own borrowing. For the creditor the collateral not only mitigates the credit risk but also allows refinancing more easily or at lower rates; in an initial hypothecation contract, however, the debtor can restrict such re-use of the collateral.<ref name = "Rehypothecation THEORY">{{cite journal 
  |title= Securities market theory: Possession, repo and rehypothecation
  |journal= Journal of Economic Theory |volume= 147 |issue= 2 |pages= 477–500 |doi = 10.1016/j.jet.2010.11.004|year = 2012|last1 = Bottazzi|first1 = Jean-Marc|last2= Luque |first2= Jaime |last3= Páscoa |first3= Mário R. |url= https://economicdynamics.org/meetpapers/2011/paper_1214.pdf }}
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