After months of bad news about the housing and mortgage markets, investors began seeing some signs of progress.
Standard & Poor's helped stocks rebound by saying that an end to subprime mortgage writedowns is in sight for large financial institutions.
The market also was cheered by new legislation unveiled in the House that would facilitate the buying up of distressed mortgages with the help of the Federal Housing Administration.
S&P said subprime writedowns could reach $285 billion, though it added that some writedowns are larger than any reasonable estimate of actual losses. A company typically takes a writedown when it expects to post a loss from a particular line of business, though the amount is often just an estimate.
"We believe that the largest players, such as Merrill Lynch and Citigroup, have rigorously and
conservatively valued their exposures to subprime asset-backed securities such that most of the damage should be behind them,'' S&P said in a statement.
It noted, however, that the positive impact of subprime disclosures is offset by worsening U.S. housing and credit markets.
Meanwhile, House Financial Services Committee Chairman Barney Frank, seeking to combat sharply rising home foreclosure rates, unveiled a bill that he said would allow the FHA "to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders."
In a draft, which he warned could change, the Massachusetts Democrat said his bill could refinance between 1 and 2 million distressed home loans by letting the FHA offer up to $300
billion in new loan guarantees.
It would also provide $10 billion in loans and grants to states to buy and fix distressed properties.
Frank said that, under his program, an existing lender or mortgage holder that agrees to write down the principal of a troubled loan could get "a short payment from the proceeds of a
new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay."
"The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower."
Under the program, he said, borrowers or loan servicers could contact an FHA-approved lender, who would then determine the size of a loan that would fit program requirements and that
the borrower could reasonably repay.
"If the current lender or mortgage holder agrees to a write-down that is sufficient to meet the requirements of the program and make the new loan affordable, the FHA-lender will
pay off the discounted existing mortgage," he said.
Several approaches are circulating in Congress to deal with falling home prices, rising foreclosures and slumping activity in credit markets. But no substantive action was expected until after lawmakers return from a spring recess that begins on Friday. Congress is scheduled to reconvene in early April.
Meanwhile, financial regulators pledged to toughen rules for mortgage brokers, lenders and credit agencies in a bid to ease a credit crunch and to try to restore investor confidence in markets.
Treasury Secretary Henry Paulson, unveiling a 20-page set of recommendations from the top-level President's Working Group, blamed a "dramatic weakening" of underwriting standards for lower-quality home loans for helping trigger turmoil in credit markets that raged on unabated as he spoke.
Paulson, a Wall Street veteran before taking over the Treasury in mid-2006, said "financial innovation" -- like the practice of slicing up so-called subprime mortgages and using them as collateral for securities sold around the world -- had made the situation worse by introducing a baffling level of complexity.
In a speech at the National Press Club, Paulson appealed to banks and other lenders not to stop issuing loans and implied they should cut back on dividends paid to shareholders if
necessary to raise capital.
"We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need those institutions to continue to lend and facilitate economic growth," he said.
Among recommendations from a top-level Presidential Working Group that he heads, Paulson said he wanted "strong nationwide licensing standards" for mortgage brokers as part of an effort to ward off future housing crises and reassure investors.
Paulson said the focus of the Presidential Working Group's work since the current bout of market turmoil began last summer was to reduce the chance of repeating past mistakes.
"Regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Paulson said.
The working group includes the heads of the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading
Commission as well as the Treasury. It issued recommendations that touch nearly every corner of the credit market, from Wall Street firms to credit rating agencies and regulators.