More than one in seven US homebuyers with subprime loans failed to keep up with mortgage payments in the second quarter, in a sign of growing distress in the housing market.

More than 619,000 homeowners – or 1.4 per cent of all those with mortgages – face the prospect of repossession, up from 1.28 per cent in the first quarter, according to estimates by the Mortgage Bankers’ Association. Total delinquencies rose to their highest level since 2002 – by 0.28 percentage points to 5.12 per cent of all mortgages.

The data indicates an acceleration in the troubles in US mortgage markets, and covers the period before last month’s credit squeeze raised the cost of borrowing.

Most of the rise in foreclosures came from growing numbers of seriously delinquent adjustable-rate subprime, and prime, mortgages. Economists expect foreclosure rates to increase dramatically as subprime loans re-set to higher rates in the coming months.

“Higher foreclosures will add to already bloated inventory of homes, extending the housing recession,” said Drew Matus, a Lehman Brothers economist, pointing to further weakness in house prices and cuts for construction companies.

While policymakers are still calculating the possible impact on the economy, financial markets have already started to price in an increase in mortgages turning sour. The Federal Reserve said on Thursday that overnight lending to banks fell by $212m in the past week to an average $1.1bn, indicating lenders had less need for emergency funds to ensure liquidity in credit markets.

Repossessions were particularly high in California, Florida, Nevada and Arizona, which hold more than one third of subprime adjustable-rate mortgages, as foreclosures rose to a rate equivalent to 290,000 evictions.

There are more than 6.2m outstanding subprime mortgages, nearly half of which are adjustable rate. Delinquencies on these mortgages rose to 14.82 per cent of all loans.

Delinquencies on prime mortgages – those made to borrowers with a good credit rating – rose to 2.73 per cent of outstanding loans, up from 2.58 per cent in the first quarter.

A report on Thursday showed jobs in the US service sector fell last month, a sign that the fall-out from the housing slump and credit squeeze is spreading to the broader economy. Employment contracted in non-manufacturing industries for the first time since July 2004, the Institute for Supply Management reported. The ISM’s employment index fell 3.8 points to 47.9 per cent over the month.

The shift in jobs came as the overall survey of the service sector showed non-manufacturing industries continued to look healthy, maintaining the same pace of growth as in July, and as revised figures on US productivity eased inflation fears.