Real Estate Finance
The act of pledging property as collateral for a loan without giving up possession of it.
Hypothecation is the process by which a borrower pledges real property as security for a mortgage loan while retaining possession and use of the property. The borrower (mortgagor) keeps the property and lives in it; the lender (mortgagee) holds a lien against it until the debt is repaid. If the borrower defaults, the lender can foreclose to collect on the security. New York is a lien theory state, which means the lender holds a lien, not title — during the loan term.
Exam Tip
Hypothecation = pledge without giving up possession. The borrower stays in the property. This is how every residential mortgage works.
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