I would define a toxic asset as an investment whose value has dropped significantly and there is no market in which to sell the asset.

To illustrate, let's assume that at the peak of the real estate market you lent $150,000 to someone who was purchasing a house for $170,000. In other words, you made a $150,000 investment and recorded it as the asset Mortgage Loan Receivable. The house is the collateral for the loan receivable. Within one year, the local housing market drops by 30% and the borrower loses her job. She stops making the loan payments and at that point your Mortgage Loan Receivable account shows a balance of $147,000. This scenario is widespread in your community and houses are not selling.

I would consider your Mortgage Loan Receivable to be a toxic asset. There are few investors willing to purchase a loan without payments being made by the borrower, the value of the collateral has dropped to less than $120,000 ($170,000 minus the 30% average drop in value), and a lot of houses are for sale with virtually no buyers.

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