Tom: Is that so? I didn’t realize that.
Tina: If you study your monthly mortgage statement, you should be able to figure this out. As said, the “mortgage paper” itself is an asset, and the bank can sell the paper to another bank or financial institute if the bank wishes.
Tom: Why would the bank want to sell the “mortgage paper” to another bank?
Tina: If the bank needs cash immediately, the bank can bundle up a bunch of mortgage papers and sell them to other banks. It is a quick way to raise money.
Tom: But who wants to buy undervalued properties? Why would someone pay for an asset that guarantees you will lose money?
Tina: That’s exactly what the problem is. If the bank could not sell the mortgage papers to raise cash, the mortgage papers become illiquid.
Tom: So illiquid mortgage papers become “toxic assets” to the bank?
Tina: Exactly. If housing prices continue to drop, the mortgage becomes even more toxic.
Tom: Are toxic assets related to “toxic” debts?
Tina: No question about it. Toxic debts refer to debts that have a lower chance or no chance of being repaid with interest. In other words, the debt is toxic to the bank or institute that will receive the payments.
Tom: What are the most common toxic debts nowadays?
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