WASHINGTON (Reuters) - The Federal Reserve took steps to encourage banks to turn more of their foreclosed homes into rental properties in new policy guidelines issued on Thursday that could help lessen the flood of distressed property sales that is depressing prices.
"Banking organizations should make good-faith efforts to dispose of foreclosed properties," the Fed said in a six-page policy statement.
But it said that given "extraordinary market conditions that currently prevail," renting out surrendered properties falls in line with its regulations.
Many at the Fed have argued that converting more single-family homes into rentals could curb declines in home prices that have fallen more than 30 percent from their peak in 2006.
The central bank issued a policy paper to Congress earlier this year and suggested lenders jump into the rental market as a way to reduce their losses on foreclosed properties, an approach that would also help shore up the housing market and meet the growing demand for rentals.
"The continued inflow of new real estate owned properties to the market -- expected to be millions more over the coming years -- will continue to weigh on house prices for some time," the Fed statement said.
The Fed cautioned that banks must always consider the overall "costs, benefits, and risks of renting," and that full documentation of a rental strategy is needed.
Banks are allowed to rent out a foreclosed property "without having to demonstrate continuous active marketing of the property provided that suitable policies and procedures are followed."
Those banks using 50 or more properties as rentals need to document how they are meeting supervisory standards, the Fed said.
Despite the number of repossessed properties being rented, the central bank reminded lenders must comply with federal, state, and local statues, including keeping up with maintenance codes and landlord-tennant laws.
Banks must carefully balance the demands of rehabilitation and leasing, the Fed warned, and establish policies to ensure the properties stay under standard maintenance codes.
If banks use property managers or outside agents to manage the repossessed properties, the Fed said contracts and solid track record are necessary.
Reporting by Margaret Chadbourn,