What exactly is a toxic asset ?

[floridablue]

Are there several categories ?

[Kansas Wyatt]

1. The end result of fraud.

Yep, that pretty much sums it up.

[spinbaby]

2. People's houses

That they can no longer make payments on.

[TCJ70]

3. A toxic asset is...

...an investment that has become impossible to make money with. Such as a mortgage a bank owns on a house that is in default and has been devalued sufficiently to not make up the difference.

At least that's my understanding of it in terms of mortgages.

[readmoreoften]

12. In plain English I believe it means "liability"....

:shrug:

[TCJ70]

13. Yeah, but...

...it sounds more harmful than a normal business function if you surround it with fancy words...

[readmoreoften]

18. Actually I think it sounds better if you call it an "asset" with a fancy negative adjective.

Maybe LOSS is a more accurate term than even liability. And a toxic asset sounds like a really good thing that can be detoxified, as opposed to a straight up loss.

[robinlynne]

4. good point. In the end, theya re houses worth less than they were bought for.

But the pieces of apper are bought and sold, not the actual hosues. I wouldn't mind having a "toxic asset". I still can't afford one, not even a little one. Wish we the popel ahd bought all the "toxic assets" AT MARKET VALUE, not at 100% of a fake value, then they could be rented out for all the people who need homes!!!!

[truedelphi]

5. DUer "Median Democrat " made a nice post about the dastardly repercussions of having

Toxic Asset purchases.

You can find it here:
http://tinyurl.com/dg5c6f

And the first response, about the toxic assets being fraudulent, sums up what they are. Nothing more than losing bundles of assets that previously made the stock market dive into the toilet, but now through whatever voodoo economics the Geithner/Bernanke team has dreamt up, a solid way to get this nation out of debt (For the right investors, the PPIP program might work wonderfully. But in terms of our national debt - it will just drive us taxpayers further into indebtedness.)

[bluesbassman]

6. No marketability.

Many homes bought at the height of the real estate boom, even those where 10% to 20% was put down, have fallen in value below the outstanding debt and thus become un-marketable from an investor standpoint.

The term is now being used on non-mortgage debt too, i.e. credit cards and auto loans that have or are perceived to go into default.

[omega minimo]

7. You spelt "asshat" wrong

[icnorth]

8. A Toxic asset is an oxymoron. n/t

[JVS]

9. From what I've been hearing, it's basically a debt agreement that has gone bad.

Now a toxic asset might actually be a bundle of mortgates, or a bundle of different slices taken from the mortgage, but here is an example that can illustrate toxicity quite simply. My example ignores interest rate because it merely makes calculation more difficult. In reality you'd have to run the mortgage calculator to be completely accurate

Suppose you found a house two years ago that cost $100,000. You put 10,000 down on it and I lent you the remaining 90,000. The agreement is that if you don't pay, I get the house. Your house is the collateral for the loan. And let's say you've paid off $20,000 of the debt so far. Now as long as your house stays at $100,000 or above, everything is easy to predict. You'll keep paying your money as long as you are able to (i.e. employed) because if you quit, you'd have paid me $30,000 for the house and loan so far and you'd end up with nothing). If you need to move, you will sell it for more than the remainder of your loan and pay me off before leaving. If you do lose your job and are unable to make payments, that isn't really a problem for me either, because I can take your house and sell it for $100,000 again. In fact, if I'm really lucky the value of the house willl have increased during your time there and maybe I can sell it for $120,000!

But suppose the housing market has grown weak and even declined. Instead of being worth $100,000, your home is now worth $50,000. You still owe that $70,000 on the house. If you were to default on the house, you'd lose the 30,000 you've put in, but at the new market price you could buy another similar house for $50,000. So while you'd have lost everything you put into the first house by defaulting, you still end up saving $20,000 of debt (not counting interest charged over the life of the mortgages). Now as a lender, I'm shitting my pants. I don't want you to default now, because if you do then I have to collect my collateral, which is worth significantly less than the money I lent you. What's more, I can't even predict whether you'll keep making payments or if you'll bail. Provided you will still be able to qualify for a mortgage if you default on this one, your best bet is to leave.

[floridablue]

14. Toxicity ? That is an impressive vocabulary

But your explanation is crystal clear. Thanks for the education

[JVS]

15. Glad to be of help

[taught_me_patience]

10. Simple

A toxic asset is an asset where the market value is lower than the book value. Think of book value as "historical" value and market value as "current" value.

Simple example:
Company buys a building for $100,000. The book value = $100,000
10 years later the "market value" of the building is $50,000 (the price they think they could sell for on the open market)
The building is now a "toxic asset" because the market value is less than book value. If they sold, they would lose $50,000 of asset value. Hence the importance of "mark to market" accounting for valuing assets.

Bank assets are pieces of paper.
Bank A buys a CDO (asset) of $1,000,000
Current market value of that asset has fallen to $.45/dollar. Thus, the market value is $450,000.
This is now a toxic asset. Multiply this by billions and you have the bank problem in a nutshell.

There are many many types of toxic assets.

[Junkdrawer]

11. A bond that no longer performs, or, in the case of America....

the core capital of our largest banks.

[Lex]

16. Real Estate that has served as collerateral that's worth less than the mortgage on it.

Or at least that's one part of what makes up toxic assets.

[floridablue]

19. Apparently by the consensus above

The three house mortgages held by me for my children make me the proud owner of 3 toxic assets. Perhaps the market will recover before one of them need to move elsewhere. So I encourage all of you to use public schools, read magazines, and listen to the radio to help make their jobs secure.

[L. Coyote]

17. An oxymoron.