To follow up to yesterday’s blog, there is today more evidence of worsening of the sub-prime carnage and of contagion from sub-prime to Alt-A and other near-prime mortgages. And the latest figures on the U.S. service sector confirm that the U.S. is headed towards a hard landing.

Let us start with the worsening sub-prime and near-prime mortgage carnage; as reported today by the WSJ:

The number of borrowers in the U.S. falling behind on the riskier types of home mortgages continues to grow, according to new data from First American Loan Performance, a research firm in San Francisco.

The rapid rise in overdue payments and defaults has forced dozens of lenders out of business or into bankruptcy protection in recent months and darkened the outlook for the U.S. housing market.

The First American data show that in January payments were at least 60 days late on 14.3% of "subprime" loans that had been packaged into securities, up from 13.4% in December and 8.4% in January 2006. Subprime loans are those made to borrowers with weak credit records or large debts in relation to their incomes.

For Alt-A loans -- a category between prime and subprime that includes many loans that don't require full documentation of the borrower's income or assets -- the late-payment figure rose to 2.6% in January from 2.3% in December and 1.3% in January 2006.

Subprime lending could decline by as much as 50% this year from last year's total of about $600 billion, says David Liu, a mortgage analyst at UBS AG in New York. Alt-A lending also is expected to fall sharply.

Together, subprime and Alt-A accounted for nearly 40% of the U.S. home-mortgage loans originated last year, according to Moody's Economy.com, a research firm based in West Chester, Pa. [emphasis added]

Overdue payments and defaults will get worse in the months ahead, warns Mark Zandi, chief economist at Economy.com, in a recent report. For one thing, he notes, many borrowers will face higher monthly payments in the next couple of years as their loans "reset" to higher rates from their low introductory "teaser" rates. Because of tighter lending standards, many won't be able to refinance into loans with easier terms.

The number of foreclosures in the U.S. is likely to reach a record 1.3 million this year, compared with an estimated 900,000 in 2006, Mr. Zandi says.

Foreclosures will cause more homes to be dumped on the market at discount prices at a time when inventories of unsold homes already are high in much of the nation.

As a result, Mr. Zandi predicts, the median price for sales of previously occupied homes will fall nearly 5% this year, which would mark the biggest national drop since the Depression of the 1930s.

As recently as January, he expected a more modest drop of 2.5%. Price changes vary greatly by region and even by neighborhood, of course. Prices are falling in some areas but still rising in others.

What do we make of these data and information? They signal spreading severe problems among a wide range of mortgages and significant downward pressure on home prices this year and next. In the meanwhile the double whammy of a manufacturing ISM near contraction (latest reading of 50.9) and now the service ISM sharply decelerating are ominous signs for the economy. Until recent the consensus argument was that manufacturing sector may have been in a recession but that the service sector – accounting for about 80% of GDP was still growing very fast. But now with the service ISM index having fallen to 52.4 in March, its lowest since April, 2003, down from 54.3 in February and from 59.0 in January, the deceleration in the growth rate of the service sector is literally dramatic. A fall from 59 to 52.4 in two months cannot be shrugged as being irrelevant to the economy. The risk of a hard landing recession is thus rising even further.
 

But let us discuss in more detail now why the mortgage problems will spread this year and why home prices are headed sharply downward triggering serious risks ahead for private consumption…