The Federal Reserve gave guidance to banks interested in renting out real estate owned property clinging to their books. The Fed laid out the ground rules, providing firms holding REOs with advice on how to follow all applicable landlord tenant, state and federal housing regulations.

"The general policy of the Federal Reserve is that banking organizations should make good-faith efforts to dispose of REO properties at the earliest practicable date," the Federal Reserve said in a statement.

"Consistent with this policy, in light of the extraordinary market conditions that currently prevail, banking organizations may rent residential REO properties (within statutory and regulatory holding-period limits) without having to demonstrate continuous active marketing of the property, provided that suitable policies and procedures are followed."

Banks that do rent out REOs are expected to set up a solid framework for recording all rental deals and transactions as well as procedures to protect and manage individual assets.

"Policies and procedures should clearly describe how the banking organization will comply with all applicable laws and regulations," the Fed said. "Policies and procedures should include processes for determining whether the properties meet local building code requirements and are otherwise habitable, and whether improvements to the properties are needed in order to market them for rent," it said.

The Federal Reserve also said banks should put operational policies and procedures in place for rental activiities, including making sure adquate insurance is in place and that tax obligations are addressed.

The Fed also said banks should make sure that "expenditures on improvements are appropriate to the value of the property and to prevailing norms in the local market."

REO to rental has been a hot topic recently.

Last year, Fannie Mae announced plans for a pilot project to sell about 2,500 of its REO to investors who would be required to rent them out for a period of time. Fannie announced the first transaction under the pilot program last month.

In March, Bank of America (BAC) said it would approach a small number of homeowners at risk of foreclosure — fewer than 1,000 — to offer them a chance to hand over their deeds and continue to rent their former homes. Under the bank's program, the former homeowners will lease their home for up to three years at or below the current market rental rate.

Only customers who have loans owned by BofA and are solicited by the bank will have an opportunity to participate.