An agreement between a borrower and a lender where by the borrower pledges asset as collateral on a loan without the lender taking possession of the collateral. It especially applies to mortgages; the borrower hypothecates
when he/she pledges the house as collateral for payment of the mortgage, or he/she may hypothecate the mortgagein order to borrow against the value of the house. In both situations, the borrower retains possession of the house, but the lender has the right to take possession if the borrower does not service the debt. Hypothecation agreements also occur in trading; a broker will allow an investor to borrow money in order to purchase securities with those securities as collateral. The investor owns the securities, but the broker may take them if the debt is not serviced or if the value of the securities falls below a certain level.
So, basically hypothecation agreement is the agreement that pledges the customers securities that were purchased on margin as collateral for the loan. The hypothecation agreement also allows the brokerage firm to take the same securities and re-pledge or re-hypothecate them as collateral for a loan at a bank to obtain a loan for the customer.