Stocks jumped Wednesday after regulators lifted investment caps on mortgage lenders such as Fannie Mae and Freddie Mac.
The Dow Jones Industrial Average, which gained 400 points in the previous two sessions, was up about 40 points just after that news broke. The S&P 500 index and Nasdaq also declined.
Shares of Fannie Mae and Freddie Mac jumped after the Office of Federal Housing Enterprise Oversight said it will lift the investment caps on the mortgage lenders' portfolios, effective March 1, freeing up billions in financing that can be reinvested in the struggling housing market.
The move opens the companies to more risk, but regulators kept in place a requirement that the firms maintain large reserves against potential losses.
Ofheo Director James Lockhart cited the companies' progress and timely results as a basis for the decision, according to a statement accompanying the decision. (Read the full text of the Ofheo statement.)
The news gave the troubled financial sector a boost, with Citigroup leading advancers on the Dow.
Earlier, Fannie Mae reported a $3.6 billion quarterly loss, that translated into a net loss of $3.80 a share, far worse than analyst expectations of a loss of $1.39 a share. Fannie Mae posted a profit of $604 million a year earlier. Freddie Mac reports earnings on Thursday.
Among other big movers on the Dow, Caterpillar and Coca-Cola advanced as exporters benefited from the euro reaching a new high of $1.51 agains the dollar.
IBM rose after the company said it is more confident about its U.S. business in the first quarter than it was in the fourth quarter, quelling concerns about corporate spending.
Another encouraging sign for corporate spending came in the morning's durable-goods report. The headline number fell 5.3 percent, more than expected, in January, but most of that came from volatile aircraft orders. Nondefense capital goods orders excluding aircraft, a good gauge for business spending, dropped 1.4 percent, which is less than the 2 percent Wall Street had expected.
The big event of the day on Capitol Hill, where Federal Reserve Chairman Ben Bernanke kicked off his two-day semi-annual economic testimony in Washington D.C. Bernanke told Congress that downside risks to the economy persist and that the Fed was prepared to continue lowering interest rates "to provide adequate insurance against downside risks." (Read the full text of Bernanke's testimony.)
In economic news, new home sales fell 2.8 percent in January to an annual rate of 588,000, the lowest rate in 13 years, the Commerce Department reported Wednesday. The median sales price of homes dropped more than 15 percent to $216,000.
Crude pulled back to about $100.57 a barrel -- after earlier topping $102 a barrel -- following news that crude inventories rose more than expected last week. Crude inventories were up 3.2 million barrels to 308,500 million barrels, higher than the 2.5 million build expected, according to a report from the Energy Information Administration.
In corporate news, Microsoft received a record-high $1.35 billion fine from the European Commission for defying sanctions imposed for antitrust violations. Shares of the software giant traded about 0.4 percent lower in premarket trading.
Luxury home builder Toll Brothers reported it swung to a loss in its fiscal first quarter amid heavy writedowns for land and other assets. The company posted a loss of $96 million, or 61 cents a share, compared with a profit of $54.3 million, or 33 cents a share, a year earlier.
Telecom-equipment giant Nortel Networks announced plans to cut 2,100 jobsas its loss ballooned to $844 million in the fourth quarter from $80 million a year earlier.
Zale shares jumped after the struggling jeweler said it plans to close more than 100 stores and cut more than 200 jobs in order to boost profits and survive the downturn in consumer spending.