toxic asset

An asset, or more usually a security, that is worth well below the price originally paid and, therefore, could have a detrimental effect of the holder. In particular, a securized loans where the value of the underlying assets are likely to be far less than the amount due on the loan. A toxic asset may take the form of a collateralized mortgage obligation (CMO) or mortgage-backed security (MBS), a collateralized debt obligation (CDO), or any similar loan that is backed by high risk debt. The toxicity of the 'asset' often arises because the security is mispriced or inadequately rated so that it does not adequately reflect the true risk of default by the borrowers or does not take into account the counter party risk (the chance that the party on the other side of the transaction may be unable to deliver on its obligation). See also Alt-A loan, distressed debt, mark-to-market, subprime mortgage.