UPDATE 2-Flagstar Bancorp sees Q2 earnings above market view

(Recasts; adds analyst's comments, background, share movement)

By Supantha Mukherjee

BANGALORE, July 14 (Reuters) - Flagstar Bancorp Inc (FBC.N: Quote, Profile, Research), one of the largest savings and loans based in the U.S. Midwest, expects to report second-quarter earnings way above Wall Street targets as it sold $1.3 billion in assets, shoring up its bottom line, and its shares rose 28 percent.

The asset sale may have contributed to the company's profit, Oppenheimer analyst Terry McEvoy said, while believing that better spreads and volumes in its mortgage business could have further added to the upside.

The company reduced its total assets to $14.6 billion from $15.9 billion in the first quarter. Flagstar reported three straight quarters of losses, since the third quarter of 2007.

"Their decision years ago to not chase growth and profitability puts them in a much stronger position today than those banks which have failed or are rumoured to fail," McEvoy said.

However, McEvoy does not expect to see any improvement in the company's underlying credit trends. He has a "neutral" rating on the stock.

For the current quarter, the company sees earnings of $15.7 million, or 22 cents a share, compared with $15.1 million, or 25 cents a share, reported in the year-ago period.

Analysts were expecting earnings of 4 cents a share, before special items, according to Reuters Estimates.