A 54% jump in FHA REOs should be screaming the obvious at investors. If you don't hear it, you're the patsy! I see that sales are down significantly. Is it due to inefficiencies at HUD or the fact that the investment market has been saturated by REO homes going into a still rapidly declining market that has input costs steadily rising as true economic unemployment rises at the same time?

As you can see, the Case Shiller Index shows a marked drop in prices, and the drop is accelerating over time - halted only by .gov bubble blowing which has effectively worn off. In addition, the Case Shiller index shows a very, need I say unrealistically optimistic view of the market.

[youtube MutLxFck9Ec]

The near term outlook actually looks worse. Dig deeper into the FHA portfolio report and you will see, contrary to proclamations from the management of big banks such as JP Morgan, et. al., that people are getting into more trouble in regards to their homes, not less...

These numbers corroborate what I have dug up regarding the shadow inventory available to subscribers, (see the latest Shadow Inventory Analysis Spreadsheet online) in that although shadow inventory looks bleak, there is a massive wave of unseen inventory waiting in the banking rafters.

Of course, JP Morgan says I'm wrong and they have released all sorts of loss reserves and provisions to pad lackluster earnings that would have assuredly resulted in a string of analyst misses to prove their point. I really want my readers to put these facts and figures into perspective in regards to banks such as JPM, for There’s Something Fishy at the House of Morgan...

JPMorgan’s Q1 net revenue declined 9% y-o-y ad 3% q-o-q to $25.2bn as non-interest revenues declined 5% y-o-y (down 5% q-o-q) to $13.3bn while net interest income declined 13% y-o-y and (-2% q-o-q) to $12.5bn. However, despite decline in net revenues, noninterest expenses were flat at $16bn. Non-interest expenses as proportion of revenues went was 63% in Q1 2011 compared with 58% a year ago and 61% in Q4 2010. However, due to substantial decline in provision for credit losses which were slashed 83% y-o-y (63% q-o-q) to $1.2bn from $7.0bn, PBT was up 78% y-o-y (15% q-o-q).

Lower reserve for loan losses and consequent decline in Eyles test (an efficacy of ability to absorb credit losses) coupled with higher expected wave of foreclosures which is masked by lengthening foreclosure period and overhang of shadow inventory, advocate a cautionary outlook for banking and financial institutions. As a result of consecutive under-provisioning since the start of 2010, JP Morgan’s Eyles test have turned negative and is the worst since at least the last 17 quarters. The estimated loan losses after exhausting entire loan loss reserves could still eat upto 8% of tangible equity.

Next up, I will try to give a mini-freebie in regards to my views on apartments.