Free US Law Dictionary

Hypothecate

The original use of the word hypothecation was for a pledge of property as collateral for a debt without transfer of possession to the party making the loan. 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.

Rehypothecation is when a broker pledges hypothecated client-owned securities in a margin account to secure a bank loan. Hypothecation is usually used for mortgages; other securities typically use collateral.

A more recent use of the word is as a contraction of "hypothetical dedication", as in a "dedicated tax" to be collected for a specific purpose. (This may be a spurious origin of the word, since the original definition of hypothecation as a pledging of assets could also be applied: the expected revenue from the tax in question being pledged to a particular cause). Dedicated taxes are often subject to unexpected shortfalls and surpluses. This may create political pressure to adjust the tax, to budget non-dedicated revenues for the purpose in question, or to reallocate surplus funds to other purposes.