of Mortgage-Backed Securities as investment and derivatives instruments. This legislative decision did not just tweak or finesse the preexisting law, it effectively repealed the Glass-Steagall Act of 1933, the only remaining statutory safeguard poised against the ensuing disaster. Subprime mortgage crisis Low-quality mortgage-backed securities backed by subprime mortgages in the United States caused a crisis that played a major role in the 2007–08 global financial crisis. By 2012 the market for high-quality mortgage-backed securities had recovered and was a profit center for US banks. Types Most bonds backed by mortgages are classified as an MBS. This can be confusing, because a security derived from an MBS is also called an MBS. To distinguish the basic MBS bond from other mortgage-backed instruments, the qualifier pass-through is used, in the same way that "vanilla" designates an option with no special features. Subtypes of mortgage-backed security include: Pass-through securities are issued by a trust and allocate the cash flows from the underlying pool to the securities holders on a pro rata basis. A trust that issues pass-through certificates is taxed under the grantor trust rules of the Internal Revenue Code. Under these rules, the holder of a pass-through certificate is taxed as a direct owner of the portion of the trust allocatable to the certificate. In order for the issuer to be recognized as a trust for tax purposes, there can be no significant power under the trust agreement to change the composition of the asset pool or otherwise to reinvest payments received, and the trust must have, with limited exceptions, only a single class of ownership interests. A residential mortgage-backed security (RMBS) is a pass-through MBS backed by mortgages on residential property. A commercial mortgage-backed security (CMBS) is a pass-through MBS backed by mortgages on commercial property. A collateralized mortgage obligation, or "pay-through bond", is a debt obligation of a legal entity that is collateralized by the assets it owns. Pay-through bonds are typically divided into classes that have different maturities and different priorities for the receipt of principal and in some cases of interest. They often contain a sequential pay security structure, with at least two classes of mortgage-backed securities issued, with one class receiving scheduled principal payments and prepayments before any other class. Pay-through securities are classified as debt for income tax purposes. A stripped mortgage-backed security (SMBS) where each mortgage payment is partly used to pay down the loan's