The Federal Reserve is encouraging banks to rent out more foreclosed properties.

The Federal Reserve issued new policy guidelines to encourage banks to rent out more foreclosed properties and, in effect, bring the number of distressed properties down.

According to Reuters, the central bank wrote a policy statement to Congress, suggesting that banks take advantage of the rental market as a way to reduce their losses on foreclosed properties. This would help level off the housing market and meat the high demands for rental properties.

“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.

Banks are allowed to rent out a foreclosed property “without having to demonstrate continuous active marketing of the property provided that suitable policies andprocedures are followed.”

The Fed said that banks using 50 or more properties as rentals need to show that they are meeting supervisory standards. The central bank also pointed out that no matter how many properties are being rented out, each lenders needs to comply with state, federal and local statutes, including maintenance codes and landlord-tenant 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.

These recent appeals to private REO rentals coincides with a long-term commitment from the FHFA for a public REO conversion plan, where the government would entice investors to buy foreclosed properties from Fannie Mae, Freddie Mac and other government lenders for fire-sale prices and then rent the units out at affordable rates (after renovating them to code, of course). In addition, Freddie Mac has begun introductory steps to launching its own conversion program independent of the FHFA.