Hypothecation - if something goes wrong

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Posted by G.O. on August 11, 2008 at 20:26:24:

I checked the archives, but couldn't find the clear answers to these questions.

I understand what hypothecation is and how it works. My question is: what happens if something does not go as planned?

I borrow money against a note (note 1) and execute a note 2, secured by the mortgage and note 1. The following two scenarios may occur:

1) I fail to comply with the terms of the note 2.
What remedies does my lender have? Does he foreclose and take possession of the note 1 or something else may happen?

2) My mortgagor fails to comply with the terms of the note 1.
If I foreclose, what happens to the note 2 since its "direct" collateral (note 1) is no longer valid?

Thank you,
G.O.

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