The Federal Reserve Board is opening the door for banks to rent REO properties in an effort to slow sales of distressed properties that are contributing to downward pressure on home prices.
Generally, banks are required to market foreclosed properties and sell the REO as quickly as possible.
However, the Fed is making an exception due to "extraordinary market conditions" and the "millions" of new real estate owned properties that are expected to be sold over the coming years.
"This policy statement reminds banking organizations and examiners that the Federal Reserve's regulations and policies permit rental of residential REO properties to third-party tenants as part of an orderly disposition strategy."
American Bankers Association executive vice president Bob Davis said the Fed's guidance is "very helpful" in clarifying what is permissible for banks.
However, becoming a landlord is a management decision each bank will have to make."A bank is only going to take this up if they see very slow sales in their areas," Davis said.
"If you can sell foreclosed properties at a reasonable price and in a reasonable time period, that will be their preference," he added.
The Fed's guidance notes that banks will receive Community Reinvestment Act credit for renting properties in certain neighborhoods.
Currently, REO properties are treated as a "substandard asset." If the property is rented and the cash flow is sufficient to generate a reasonable return, it will be considered an earning asset.