US stocks rose this afternoon after lenders Fannie Mae and Freddie Mac got permission to invest more money in the mortgage market after the Office of Federal Housing Enterprise Oversight lifted an investment cap on the companies.
The regulator's decision could provide much-needed cash to stabilise the battered US housing market by giving them more flexibility to invest.
Both companies are Government-sponsored enterprises operating in the secondary mortgage market and assist buyers who might otherwise struggle to secure a home loan or rental accommodation.
The firms are properly known as the Federal Home Loan Mortgage Corporation (Freddie) and the Federal National Mortgage Association (Fannie).
Shares of Fannie Mae, which before the market open posted a larger-than-expected $3.6 billion quarterly loss, climbed to $30.41 on the New York Stock Exchange, and Freddie Mac shares rose to $27.88.
Citigroup led the advance on the S&P 500 with a gain of about 2 per cent, while American Express led Dow financials, with a jump of about 1 per cent.
The lifting of investment caps will free up cash for the mortgage finance companies to invest in the US housing market, a step that could help ease the housing market downturn.
Fannie Mae shares rose 12 per cent, while Freddie Mac climbed 10 per cent.
"The news is obviously very good for the market, as it means more people can invest in Fannie and Freddie," said Edward Craig, head of US cash equities trading at Jefferies in New York.
The Dow Jones industrial average was up 35.74 points, or 0.28 percent, at 12,720.66. The Standard & Poor's 500 Index was up 2.22 points, or 0.16 percent, at 1,383.51. The Nasdaq Composite Index was up 8.59 points, or 0.37 percent, at 2,353.58.
Stocks had wavered earlier following weaker-than-expected January data on new home sales and orders of long-lasting manufactured goods.
On Capitol Hill Federal Reserve chairman Ben Bernanke said that downside risk still dogged the economy despite a series of interest-rate cuts.
He told the House Financial Services Committee that he would act in a timely manner to support growth and provide insurance against downside risks.
A slide in the dollar also underpinned the market as shares of exporting companies, including Caterpillar rose 2.1 per cent to $74.87.