What does Hypothecation refer to in the context of property?

Hypothecation refers to the practice of pledging property as security for a loan while retaining possession of that property. This concept is fundamental in financing, as it allows a borrower to secure funding without surrendering control over the asset being used as collateral. For instance, if a homeowner takes out a mortgage, the house is hypothecated to the lender; the homeowner keeps living in the home and maintains ownership while the lender has a claim against it should the homeowner default on the loan.

In contrast, other options capture different aspects of property ownership and financing but do not align with the definition of hypothecation. Complete transfer of property ownership implies a change in title and rights, which does not reflect hypothecation's principle of retaining possession. Defaulting on a loan is related to failure to fulfill loan obligations, while foreclosure specifically addresses the legal process of selling a property due to such a default. Each of these other options involves either a complete loss of ownership or a change in the legal status of the property, which are distinctly different from the concept of hypothecation.