WASHINGTON -- JPMorgan Chase & Co.'s fat investment banking profit masks a dark underside of the U.S. recovery - the housing market is still a mess and homeowners are defaulting at an alarming rate.

Heralding what's in store for other major banks, JPMorgan reported almost $3.6-billion (U.S.) in profit in the third quarter - a stunning 580-per-cent surge from the same quarter last year - cementing the perception that banks are emerging strong and healthy from the recession.

Citigroup, Bank of America and Goldman Sachs also report their results this week, and analysts expect more of the same. Thanks to the cheap credit the Federal Reserve is flushing through the financial system, the major Wall Street banks are generating enormous bond-trading profits.

The remarkable rebound of the big U.S. banks cheered investors, who pushed the Dow Jones industrial average above the psychologically important 10,000-point mark yesterday for the first time in nearly a year. The Dow closed at 10,015.9, up 144.8 points or nearly 1.5 per cent.

Look beyond Wall Street, however, and it's a different story. Unemployment is rising, incomes are under pressure, credit is tight and Americans are still losing their homes in record numbers. As a result, the housing market, where the recession began, continues to inflict a heavy toll on banks.

JPMorgan nearly doubled to $4-billion the reserves it has set aside to cover current and future losses on home mortgages because homeowners continue to default. The bank also boosted to nearly $5-billion its reserves for credit card and retail banking losses, swelling total loan-loss reserves to $31.5-billion.

That helps explain the cautious response to the bumper profits from chief executive officer Jamie Dimon.

"While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue," Mr. Dimon said.

And mortgage delinquencies remain far too high, according to chief financial officer Michael Cavanagh. "We have to watch the economy and see where it heads," he told reporters and analysts on a conference call.

JPMorgan is often seen as a bellwether for the banking industry.

It was among the first financial services companies to warn of an impending mortgage meltdown. It was also the first bank to give back the U.S. government's bailout cash. And now it's leading the profits comeback.

But beyond the shadow of Wall Street, there's another banking industry, where there are no trading profits to paper over the core activity of lending to homeowners, commercial building owners and businesses.

Federal Reserve governor Daniel Tarullo warned a congressional subcommittee yesterday that U.S. banks are still facing hefty additional credit losses, particularly in housing and commercial real estate.

"Nearly two years into a substantial recession, loan quality is poor across many asset classes and continues to deteriorate as lingering weakness in housing markets affects the performance of residential mortgages and construction loans," Mr. Tarullo said.

"Higher loan losses are depleting loan-loss reserves at many banking organizations, necessitating large new provisions."

U.S. consumers are increasingly late paying off mortgages on their primary home, as the highest unemployment in a quarter of a century pushes up delinquency rates on home loans and most other types of lending, according to a monthly report by the Equifax credit bureau. Among U.S. homeowners with mortgages, a record 7.65 per cent were at least 30 days late on payments in September, up from 7.58 per cent the previous month. The rate of delinquencies is more than double the 3.55 per cent rate in September, 2007, according to Equifax.

For JPMorgan and the other major Wall Street banks, that's okay because these losses are more than offset by impressive investment banking profits.

But it's not true of many regional and second-tier banks, which don't do bond trading or merger financing.

There isn't much of a hint of recovery yet in some of the hardest-hit real estate markets, such as South Florida. Miami real estate agent Peter Zalewski of Condo Vultures LLC said foreclosures and home repossessions are continuing to rise, suggesting that the market still hasn't hit bottom.

Speculators who bought Miami oceanfront condos were the first to run into trouble. Now, average working Americans are in difficulty, Mr. Zalewski said.

"It's the typical family of four with a dog who's losing their home now," he said.

Mr. Zalewski, who keeps an extensive database of real estate transactions, pointed out that foreclosures rose 25 per cent in the third quarter from the same period last year in south Florida. And banks repossessed 16 per cent more properties.

"Short of government intervention or an immediate economic recovery," that trend is likely to continue for some time, Mr. Zalewski said.

South Florida isn't the only market that's still inflicting losses on the banks. Economist Steve Cochrane of Moody's Economy.com said the pace of the recovery is being held back by "deeply correcting" housing markets in California, Florida and across the Southwest.

Home prices are still falling in most of the country and that's filling the pipeline of foreclosures "nearly everywhere," Mr. Cochrane remarked.