The RMLS of Minnesota, which is the governing body of the MLS in the Twin Cities and is owned by the 4 local REALTOR associations, has made some policy changes in regards to the reporting of foreclosures on the MLS, effective on Thursday:

The “In Foreclosure/Lender Owned?” field:

• Initially will be an agent-only field (not available on Customer reports or on public Web sites through Broker Reciprocity).
• Options are: Yes, No and Not Disclosed
• For NorthstarMLS, Foreclosure is defined as the homeowner being served official notice of foreclosure by a governing entity (does not include notice of default from the lender when payments are late).
• If you select Yes, you certify that you have permission from the seller to disclose that the property is in foreclosure.
• This field is being added in response to the large increase in foreclosure status properties and agents desire to more easily search them when the seller has agreed to disclose it.  Our goal is to initially keep this information on the MLS simple and rely on agents to communicate with each other regarding the details.
• If you edit an existing listing after the implementation, you will be required to complete these fields before saving the listing.

While I applaud RMLS’s efforts on this issue, it seems to me that they’re missing much of the issue.  This new policy ignores the following:

Houses Listed as Short Sales on the MLS
These houses are listed at a price where they have negative equity at the closing table and the seller has no financial ability to pay the difference so the seller is asking their lender(s) to take less than they are owed (a “short pay” or “short sale”) as payment in full.  In many circumstances a house is listed on the MLS as a short sale far before official foreclosure proceedings have begun, so these situations are not covered by the new policy.  Since offers on houses in a short sale situation can take months to get a response back from the lender(s), it seems critical to me and my buyers that this information is clearly disclosed upfront… often my buyers have no time or no interest to wait around for 60-75 days for a 50/50 chance of a “yes.”  Since banks do not give a seller direction ahead of time on what price they’re willing to accept, the list price chosen by the seller and any offers submitted

Houses that are Lender Owned
Since the new RMLS policy takes into account only those houses that are in the foreclosure process, once the house is lender owned (also known as bank owned or REO), there would be no disclosure of it in this new field.  While responses from sellers of REOs are quicker, they can still take a week and come with 10-15 pages of “AS-IS” addendums, basically eliminating most disclosures and protections for the buyer and overriding most of the contract language that is used on the standard purchase agreement forms in Minnesota.  As such, some buyers have no interest in these properties and many others specifically want these properties since they can typically be purchased for substantial discounts to market value.

Considering that a little more than 1 in 4 of the sales occurring in the Twin Cities today is a foreclosure or short sale, it seems crucial to me that we have the best information possible on these properties and that they are easily searchable and reportable.  The current policy that the RMLS is implementing is akin to have a way to search for “one story” homes but not “two story” or “split level” homes.

Instead of the current policy, here’s my suggested solution:

Two fields on the RMLS:

Short Sale Subject to Lender Approval (with options of Prior to Sheriff’s Sale and Post Sheriff’s Sale)
These properties require the approval of the purchase agreement by the homeowner (easy to get) AND the lender (not as easy to get).

Lender Owned
These properties are repossessed by the lender via foreclosure or deed-in-lieu of foreclosure and the lender/bank is the only decision maker.

This would address all the properties in some stage of lender mediation and would make disclosures clearer to buyers and market data for all users of the MLS that much more reliable.

I’d love to hear thoughts from the public… please leave comments below.