What Does A Hypothecation Agreement Mean

For example, a rental property can be given as security for a mortgage issued by a bank. Although the property remains a guarantee, the bank is not entitled to the rental income that comes in; However, if the owner defaults on the loan, the bank can seize the property. The main purpose of the obligation is to mitigate the creditor`s credit risk. If the debtor cannot pay, the creditor owns the security and can thus claim his assets, sell them and thus compensate for the lack of cash inflows. In the event of default by the debtor without prior collateral, the creditor cannot be sure that he can seize sufficient assets from the debtor. Because the mortgage facilitates access to debt and perhaps reduces its price; the debtor wants to pledge as many debts as possible – but isolating the “good assets” for the guarantee reduces the quality of the debtor`s remaining balance sheet and therefore its solvency. An example of a mortgage was seized by the Court of Justice in 1991 with the case bank IV Topeka v. Topeka Bank & Trust Co. Here, in February 1984, Florene E. Lauver issued a $100,000 certificate of deposit (CD) from the Capitol Federal Savings & Loan Association. The CD lasted until 9 February 1987.

In July 1984, Lauver entered into a loan agreement that gave Richard Cummins permission to use the CD as collateral at Topeka Bank & Trust Co. When an investor asks a broker to buy margin securities, a mortgage can occur in two ways. First, the purchased assets can be piled up so that if the investor cannot maintain loan repayments, the broker can sell some of the securities; [1] The broker can also sell the securities if they lose value and the investor does not respond to a margin call. The second meaning is that the initial deposit that the investor deposits for the margin account may itself be in the form of securities and not in the form of a cash deposit, and again, the securities belong to the investor, but can be sold by the creditor in the event of default. In both cases, unlike consumer or business financing, the borrower usually does not own the securities because they are in accounts controlled by the broker, but the borrower still retains legal ownership. .