U.S. mortgage default rates hit an all-time high in the first quarter of 2007. Rising delinquencies will add additional pressure to a slowing housing market. But the real threat to the housing market and the economy is not the recent slew of sub-prime mortgage defaults, but the lending ramifications associated with widespread sub-prime bankruptcies.

According to Equifax, the percentage of mortgages in default rose to 2.87 percent—eclipsing the worst levels following the 2001 recession. In fact, defaults in many categories—first mortgages, second mortgages and home equity loans—were each significantly up.

Mississippi and Texas led a nationwide increase in the number of defaults. Actually, conditions deteriorated in all but six of the nation’s 50 states.

“The news is unremittingly bad,” said cnbc’s senior economic correspondent.

But so far, most of the housing carnage has been confined to sub-prime borrowers. As long as defaults do not spread to the general mortgage market, many economists feel the economy should be able to weather the storm.

However, the biggest threat to the housing market—and subsequently the economy—is not the rising number of sub-prime defaults. The sub-prime market as a percentage of overall loans is relatively small, and although foreclosure losses, and corporate lender and originator losses, will not help an already slowing economy, they probably won’t by themselves derail it.

The real threat to the economy is the tightening of credit conditions that are in large part a result of those sub-prime mortgage losses. With rising default rates and soaring investment losses, sub-prime lenders have tightened up their loan standards. The days of “anyone and their dog” being able to walk in off the street and receive a no-documentation, self-certified income loan are just about over.

Over the past few years, sub-prime loans have grown to take up one quarter of the U.S. mortgage market. In other words, a quarter of the nation’s home demand may be about to evaporate as sub-prime mortgage lenders continue to go bankrupt and lending standards are tightened.

Without that demand, housing prices, along with new construction, will probably continue to fall—two big challenges for an economy that has become dependent on a rising housing market.