Hypothecation is the practice where an individual gives control of collateral in order to receive a loan. Hypothetically, the granter of the loan has control of collateral until the loan and all fees are completely paid off.
In most cases, one would hypothecate their home or business in order to be granted a loan from the bank. There are many other forms of collateral that can be left in various circumstances, including any item of vale that meets of exceeds the vale of a loan.
If the borrowers should fail to answer all contractual terms in the loan agreement, the bank may take control of collateral. For example, the bank may place a lien in a home, until the homeowner makes payments which bring them up to date on the mortgage.
That lien prevents the owner from selling the home without the banks approval and if it is sold, monies would be returned to the bank. In addition, there is a point at which the bank can take ownership of that home, by properly executing the foreclosure process.
When an individual hypothecates their home for a loan, and they default on that loan they lose their home, as well a monies they have already paid towards that loan.
Hypothecation can occur when the bank takes the collateral for loans and then uses that collateral to get loans for the bank. In that case, the bank is responsible for paying those loans,or the owners of that property could lose their home. However, the chances of the rehypothecation coming to the point at which the original collateral is taken for another loan are fairly slim.