Talk:Hypothecation

Rehypothecation

Needs rewording, at least.

"Rehypothecation is a professional financial market practice, where counterparty reuses a security pledged as a collateral for its own use."

Is ambiguous and missing an article ("the counterparty").

Is Rehypothecation where the borrower reuses, as collateral, a previously pledged security. Or is it where the lender reuses the security?

I admit that I'm having troubling understanding. Xkit (talk) 18:19, 31 October 2014 (UTC)

Hi Xkit, I restored the wording I'd originally added, which hopefully is clearer. To answer your question, Rehypothecation is a two step process used by entities that are both borrowers and lenders.

Step 1: BankXk lends some funds to a borrower, and gets some collateral in return.
Step 2:, BankXk decides it can increase its profits by increasing its leverage, i.e. by borrowing itself. As part of this second transaction, BankXk passes over the same collateral it got from step 1 to its own creditor.

So essentially the same collateral is being reused, and especially before the 2008 crisis, the same collateral could be recycled many times, especially in certain financial centres like London FeydHuxtable (talk) 18:48, 31 October 2014 (UTC)

Confusion#2

"The arrangement is common with modern mortgages - the borrower retains legal ownership of the property but provides the lender with a lien over the property until the debt is paid off." - I think that this is wrong. The borrower transfers legal ownership to the lender in a mortgage, and the legal ownership (of the house) is only re-transferred to the borrower when the loan is repaid. Please note, however, I am English and there may be a difference between UK/US 'mortgages'..

In the United States, mortgages are regulated by each state. In "Lien Theory" states, the borrower (mortgagor of the property) keeps legal ownership and just gives the lender a lien. In "Title Theory" states, the actual title (ownership) is transferred to the lender until the debt is paid off.  :-) See: http://title.grabois.com/ Lawyer2b (talk) 01:26, 26 August 2009 (UTC)

In the UK too, a bank or building society (mortgagee) providing a loan subject to a mortgage does not gain legal ownership of the property at the outset. They are granted and hold a lien or a charge against it. This lien or charge has to be registered at the land registry and may be seen by anyone conducting what is known as a 'search'. Anyone doing so can see that the property title is in fact in the name of whoever bought the property, irrespective of any outstanding mortgage. They would also see any encumbrances registered against the property including mortgages. This is an important point and it goes to the heart of much of the current financial turmoil.

The confusion may have arisen because UK banks and building societies used to insist on holding the title deeds as long as mortgages remained unredeemed. The practice is largely obsolete now that Land Registry Certificates have replaced Title Deeds. Even though mortgagees may have held the physical deeds they did not "possess" the property.

In the event of a default the mortgagee may initiate foreclosure on the property without recourse to the owner. Usually through a legal process, the mortgagee may sell the property and apply the proceeds to settle the mortgage, outstanding interest and any costs. If there were a shortfall the ex-owner would be liable for it. If there was a surplus the ex-owner would be entitled to it.

There may be further confusion in this article over the section Hypothecation in consumer and business finance. It is stated "if a consumer takes out an additional loan secured against the value of his mortgage" That perhaps is an error: maybe equity in the property should replace mortgage. Consumers can only remortgage property that is worth more than the amount outstanding on any first mortgage. The mortgage itself is a liability and is no good as collateral.

Further it is stated "the creditor can still seize the house but in this case the creditor then becomes responsible for the outstanding mortgage debt." In practice a second mortgage would generally be subordinate to the first mortage and perhaps that is what was meant. Consequently the creditor, the holder of the second mortgage would not be able to seize the house. The most likely outcome would be a sale by mutual agreement of the parties holding the liens. This would almost certainly involve legal process. Settlement of the debt due to the first mortgagee would be first priority, then settlement of the second debt due to the 'remortgagee', finally any balance would be due to the 'ex-owner'. Again the liablity for any shortfall to the two mortgagees would be the responsibilty of the 'ex-owner'.

In the present climate is is important to clarify these matters. Perhaps someone with appropriate professional experience and knowledge could correct this article.

--Johnny Cyprus (talk) 17:13, 1 November 2011 (UTC)

Confusion

I came here from Eldfell, which uses the term "hypothecated sales tax". It's unclear from the article what this means. I assume the first definition is the same thing as collateral (finance). It's unclear from the article whether the second definition is anything different than a Bond (finance), or if it's some kind of per-transaction tax on securities. -- Beland 14:50, 14 April 2006 (UTC)

The difference is the fact that in collateral finance there is a transfer of property (possession) which is the collateral. Until the debt is repaid, or if the debt is unpaid the collateral belongs to the debt issuing party. In regards to this definition, there is no transfer of possession. It is just as the term implies. Hypothetical dedication. It is just as you stated for the second definition. "a kind of per-transaction tax on securities.--Gnosis 16:00, 14 April 2006 (UTC)

OK, I have re-written the article to be a bit clearer, based on your explanation. Please check it for accuracy. The part about shortfalls automatically being made up from other sources is certainly not true. It's often hotly debated whether or not a dedicated revenue stream is, in fact, not providing adequate funding, and if not, whether other revenues should be diverted. When budgets are tight, that often just doesn't happen. -- Beland 17:25, 30 April 2006 (UTC)

Wouldn't it be clearer just to link to earmark (finance)? Night Gyr (talk/Oy) 08:23, 8 December 2006 (UTC)

I have moved the link in Eldfell to hypothecated tax which more closely explains the concept. Sargdub (talk) 22:25, 13 July 2015 (UTC)

Merge?

I came here for hypothecation and rehypothecation and i feel that if both the topics are rpoperly clubbe together then they might make a better sense

Agreed. Now done. Klbrain (talk) 06:57, 9 April 2017 (UTC)

Obligor?

Who is the "obligor" referred to in the third paragraph? Is this the same as the debtor? The term is used without definition. Thanks. — Preceding unsigned comment added by 2601:600:8E00:18BE:A8F2:3F64:29E7:AC63 (talk) 20:17, 8 December 2016 (UTC)

pawn shop

I know finance types might balk at the idea but isn't this the same principle as a pawn shop? If so it would provide a reference that was culturally comprehensible to that class of people who don't (and probably never will) own a mortgage. Reading the first line I thought 'pawn shop' but then the example was a mortgage and I wondered if there were a difference, it didn't seem so from the rest of the article. Aach (talk) 11:21, 30 January 2018 (UTC)