When Banks Stopped Lending, Owners Became the Bank

Banks Lend Least When Owners Need Them Most

Bank mortgage lending runs with the economy, not against it. In good times, lenders compete for borrowers and loosen standards. When a recession hits, rates spike or losses pile up, they raise credit-score minimums, ask for bigger down payments, drop whole loan categories or simply lend less.

That pullback tends to arrive exactly when many owners most need to sell, because of a job move, a death in the family, a divorce or retirement.

When banks step back, there is an old workaround. An owner who holds a property free and clear, or who has a loan the buyer can legally take over, can act as the lender. The buyer makes a down payment, signs a note and a mortgage in the seller's favor, and pays the seller every month. Here is how that played out in past credit squeezes, and what it means for New York City today.

Every U.S. Recession Since 1945

The National Bureau of Economic Research (NBER), whose dates are the standard reference for U.S. business cycles, has identified 13 recessions that began in 1945 or later. Measured from peak to trough, they averaged about 10 months, and only three lasted longer than a year: 1973–75, 1981–82 and 2007–09.

For owners, what matters is less a recession's length than what it does to mortgage credit. Some downturns barely touched home lending; others brought sharp jumps in mortgage costs or lenders pulling back from whole groups of borrowers.

The hardest stretches for buyers came when the trouble ran through the lending system itself: savings institutions squeezed by high rates in the 1970s and early 1980s, thrift and bank failures around 1990, and the mortgage meltdown of 2007–09. The sections below look at those stretches, then at 2020 and today.

1979–1982: The Volcker Rate Shock

By the end of the 1970s, inflation was running in double digits. In October 1979 the Federal Reserve, under Chairman Paul Volcker, shifted its focus to controlling the money supply and let short-term interest rates rise as high as needed. Mortgage rates followed. According to Freddie Mac's Primary Mortgage Market Survey (PMMS), the average 30-year fixed rate peaked at 18.63% in October 1981, the highest reading since the survey began in 1971.

The chart below tracks the Freddie Mac 30-year rate from 1971 to today, with recessions shaded.

At those rates, the math stopped working. On a $100,000, 30-year loan, the principal-and-interest payment at 18.63% is about $1,559 a month, nearly double the roughly $805 payment at 9%. Many buyers could no longer qualify, and sellers who needed to move could not wait for rates to fall.

The era of "creative financing"

The answer was what the industry called creative financing. The main tools:

• Seller carrybacks (purchase-money mortgages). The seller took a down payment and held a note for some or all of the rest of the price, often below bank rates and with a balloon a few years out.
• Loan assumptions. FHA and VA loans of that era could generally be taken over by a buyer, and some states limited lenders' ability to enforce due-on-sale clauses on conventional loans. Taking over a loan written years earlier at 7% or 8% was a large advantage.
• Wraparound mortgages. The seller kept paying the original low-rate loan while the buyer paid the seller on a new, larger note that "wrapped around" it.
• Land contracts. The buyer paid in installments and the seller kept legal title until the contract was paid off.

These were often combined: the buyer assumed the seller's first mortgage, and the seller carried a second mortgage for part of the remaining equity.

Garn–St Germain closes the assumption door

Lenders wanted to stop buyers from taking over their old, low-rate loans. In June 1982 the U.S. Supreme Court, in Fidelity Federal Savings & Loan Association v. de la Cuesta, upheld federally chartered savings and loans' right to enforce due-on-sale clauses. That October, Congress went further. The Garn–St Germain Depository Institutions Act of 1982 made due-on-sale clauses broadly enforceable nationwide, overriding most state restrictions, with a temporary window for some existing loans and a short list of exceptions, such as certain transfers to a spouse or children and transfers after a borrower's death.

That curbed assumptions and wraparounds of loans never designed to be assumable: if an owner transferred the property without the lender's consent, the lender could demand the full balance. Seller financing itself survived. An owner with no mortgage, or one who paid off the old loan at closing, could still carry a note. But the aggressive structures became far riskier, and they remain risky today. Rates eased after 1982, but by today's standards they stayed high for the rest of the decade, mostly around 10% or above.

Late 1980s to Early 1990s: The S&L Crisis and the Credit Crunch

For decades, savings and loan associations, or thrifts, funded long-term, fixed-rate mortgages with short-term deposits. When rates soared, many paid more on deposits than they earned on old loans. Deregulation, including parts of the same 1982 law, then let many move into riskier lending, and losses grew.

The cleanup was enormous. According to the FDIC, 1,043 thrifts with more than $500 billion in assets were closed or otherwise resolved between 1986 and 1995. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) abolished the old thrift regulator and its insurance fund, created the Resolution Trust Corporation to take over failed thrifts and sell their assets, and imposed tougher capital standards.

The 1990–91 credit crunch

Banks were under pressure too, with new risk-based capital rules phasing in and examiners scrutinizing real-estate loans. When the economy slipped into recession (NBER dates it from July 1990 to March 1991), policymakers and the press widely described a "credit crunch." Banks cut back on real-estate lending, and many borrowers who once would have qualified could not get loans.

New York City's slump

New York was hit hard. After the 1987 stock market crash and the job cuts that followed, the city's economy weakened, and its real estate market slumped from roughly 1989 into the early 1990s. Prices fell for many co-ops, condos and small buildings, sales slowed and lenders grew cautious.

Owners who had to sell, such as estates, retirees and families relocating for work, could not always wait years for a recovery, and the pool of buyers who could get a loan was thin. Carrying a note was one way to close: the seller took a meaningful down payment, held a first or second mortgage and collected monthly payments, often with a balloon timed for when the buyer expected to refinance.

2008–2010: When the Mortgage Market Froze

The mid-2000s housing bubble was built on loose lending: teaser rates, little or no documentation of income, and loans bundled into private mortgage-backed securities. When prices began to fall and those loans defaulted, the system seized up. In September 2008, Fannie Mae and Freddie Mac were placed into federal conservatorship and Lehman Brothers filed for bankruptcy.

Private securitization of loans outside government programs largely stopped. Banks raised credit-score cutoffs, required larger down payments and demanded full documentation. Self-employed buyers and anyone without a long, clean credit history were among the first shut out.

Dodd-Frank and the Ability-to-Repay rule

Congress responded with the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010, which created the Consumer Financial Protection Bureau (CFPB). The CFPB's Ability-to-Repay and Qualified Mortgage rules took effect in January 2014. They require most mortgage lenders to make a reasonable, good-faith determination, based on verified information, that a borrower can repay.

Individual sellers need to know about these rules too. Regulation Z, which implements the Truth in Lending Act, contains limited exclusions for owners who seller-finance one property, or up to three properties, in a 12-month period. Each comes with conditions. The three-property exclusion, for example, requires a fully amortizing loan, which rules out a balloon, and a good-faith determination that the buyer can repay. The one-property exclusion is limited to individuals, estates and trusts and has its own conditions. Whether a deal fits, and which other federal and New York rules apply, depends on the facts, so both sides should have their own attorney.

2020: The Shortest Recession on Record

NBER dates the COVID-19 recession from February to April 2020: two months, the shortest U.S. recession on record. For a few weeks that spring, the mortgage market wobbled. Unemployment soared, and the CARES Act let borrowers with federally backed mortgages request forbearance.

Many lenders tightened temporarily. In April 2020, JPMorgan Chase said most new mortgage applicants would need a credit score of at least 700 and a 20% down payment. Many lenders also paused jumbo and non-QM loans, which serve higher-priced homes, self-employed borrowers and buyers with non-traditional income documentation. In high-cost New York City, those pauses mattered.

The pullback was short. The Federal Reserve cut short-term rates to near zero and bought mortgage-backed securities, and Freddie Mac's 30-year average fell below 3% for the first time in July 2020, reaching a record low of 2.65% in January 2021.

Even a brief pause can derail a closing; a seller whose buyer lost a loan approval mid-deal could carry a short-term note until bank credit returned. And private seller-held loans were not covered by federal forbearance programs, so note holders had to handle hardship cases on their own. Clear default and workout terms help both sides.

2022–2026: Higher Rates and the Lock-In Effect

The Federal Reserve began raising rates in March 2022, and mortgage rates moved quickly. Freddie Mac's 30-year average went from about 3% in 2021 to above 7% by late 2022, and reached 7.79% in late October 2023. As of Oct 15, 2026, it stands at 7.40%.

That jump created what economists call the lock-in effect. Millions of owners bought or refinanced at 3% or less in 2020 and 2021. Selling would mean giving up that rate and borrowing at more than double it, so many stay put. A Federal Housing Finance Agency (FHFA) working paper estimated that lock-in prevented about 1.72 million home sales nationally between mid-2022 and mid-2024.

So seller financing and loan assumptions are back. FHA, VA and USDA loans are generally assumable if the buyer qualifies and the servicer approves; see our guide to how assumable mortgages work. Most conventional loans are not, because of due-on-sale clauses. Owners who own outright, including many longtime owners who paid off their mortgages years ago, can offer financing on their own terms.

What Seller-Financing Terms Look Like Today

There is no official survey of seller-financing rates, and every deal is negotiated, but a common pattern today looks like this.

The premium reflects the risk the seller takes on in place of a bank. In return, the buyer gets flexibility: no bank underwriting, often a faster closing and terms shaped around their situation. Everything is negotiable.

On a $500,000 seller-held loan at a hypothetical 9.5% with 30-year amortization, the monthly principal and interest is about $4,204. After five years, about $481,000 would still be owed. The buyer needs a realistic plan to refinance or sell well before that date.

New York's usury limit

New York's civil usury limit is 16% per year, and charging more than 25% can be a crime. A loan that breaks the usury rules can be unenforceable, so treat the cap as a hard ceiling. Some larger loans are treated differently, another question for your attorney. Today's typical seller-financing rates sit well below the cap.

Plan for the balloon

If rates are still high in five years, or the buyer's finances have not improved, refinancing may be hard. An extension option written into the note, a longer balloon or penalty-free prepayment can reduce that risk. And because a balloon may not fit every Regulation Z exclusion, have an attorney review the structure before anyone signs.

Lessons for NYC Owners and Buyers Today

Each crisis played out differently, but the pattern repeats: when banks pull back, deals still get done between owners and buyers willing to meet in the middle. History does not say where rates go next, but owner financing was a practical tool in each tight-credit period above.

Who should consider it

• Owners who own free and clear. With no bank loan on the property, there is no due-on-sale clause to worry about.
• Retirees who would rather have monthly income than a lump sum. Spreading payments over time may also allow installment-sale tax treatment; ask a tax professional.
• Estates and heirs who need to sell in a slow market, or whose property banks find hard to lend on, such as a mixed-use building or one with open violations.
• Buyers with real income but non-traditional documentation: the self-employed, small business owners, gig workers and people with short credit histories.

Protections both sides need

• Separate attorneys. In New York, buyer and seller customarily each have their own lawyer. See our guide to finding a real estate attorney for seller financing.
• Title insurance: an owner's policy for the buyer and a loan policy protecting the seller's lien.
• A recorded mortgage. In Manhattan, the Bronx, Brooklyn and Queens, mortgages are recorded with the City Register; on Staten Island, with the Richmond County Clerk. New York's mortgage recording tax applies to seller-held mortgages too.
• Escrow for taxes and insurance, with the seller named on the insurance policy as mortgagee.
• A loan servicing company to collect payments, keep records and issue year-end interest statements.
• Clear default and balloon terms: late fees, grace periods, what happens at maturity and how an extension would work.
• Real underwriting. Sellers should check the buyer's credit, income and down payment source, just as a bank would.

If you are new to the mechanics, start with our guide to how seller financing works. To see New York City properties whose owners may be open to financing a sale, browse the property map.

Frequently asked questions