Foreclosure mess doesn't dent bank stocks

NEW YORK (Reuters) - Bank shares have proved resilient despite the widening U.S. foreclosure crisis, as investors view the growing furor over foreclosures as a procedural problem instead of a deeper issue of how homes are repossessed.

The attorneys general of all 50 states on Wednesday launched a joint investigation of the practices banks used in evicting delinquent borrowers from their homes, in a move that some experts fear will damage the ailing housing market.

But even as some of the biggest banks have announced that they are delaying foreclosures in many states while they review foreclosure processes, investors remain sanguine about the outcome for banks.

"This may push out mortgage foreclosures until later in the future, but I don't see how it affects the fundamental profit outlook of the banks," said Bill Fitzpatrick, an analyst covering bank stocks at Optique Capital Management in Milwaukee.

JPMorgan Chase & Co said on Wednesday it had identified "some issues" in its review of foreclosure affidavits but sought to reassure investors that any problems were contained.

The announcement came two weeks after JPMorgan said it was delaying foreclosures in 23 states while it reviews the way it processes them.

Since then, JPMorgan's shares have risen about 2.3 percent. The bank's shares fell 1.4 percent on Wednesday after it posted earnings that beat expectations, but said loan demand is muted in some sectors.

Bank of America Corp said on Friday it was suspending foreclosures in all 50 states. Since then, its shares have barely budged.

JPMorgan's management seemed fairly confident on Wednesday that its foreclosures will stand up.

On a conference call with reporters, the bank's chief executive, Jamie Dimon said, "There's almost no chance we made a mistake" in the affidavits. The bank is "pretty comfortable" that at the end of the process its foreclosures were proper, he added.

Analysts at Barclays Capital said that to the extent there's a problem, it's likely procedural.

"We suspect most disputes are about court documents, not necessarily whether the borrower defaulted," wrote a team of analysts led by Jason Goldberg.

But analysts cautioned that banks could still suffer as scrutiny on home repossessions intensifies.

It is unclear if the joint probe by the U.S. state attorneys general and other reviews by bank regulators will produce evidence of widespread fraud.

The KBW Banks Index closed 1 percent lower on Wednesday, but it was not clear whether stocks were reacting to JPMorgan's results or the announcement of the joint state probe.

Banks also face political risk with some prominent Democratic lawmakers calling for widespread foreclosure halts, despite reluctance from the White House to follow suit.

If widespread "fraudulent activity is found, banks would likely see fines and penalties," said a team of analysts at Citigroup.

The analysts at Barclays said, "It could take some time to clear up this issue."

(Reporting by Dan Wilchins; Editing by Leslie Adler)