User Login Form Error Message Problem
What is the reason for you adding the form in that manner and having custom validation etc. when drupal already gives you this?

For example, why not just use the drupal block system or the context module to place the login block on your homepage within one of the regions?

Another thing is that your custom module should not have  

function hook_form_alter(&amp;$form, &amp;$form_state, $form_id)


it should be  

function MODULE_NAME_form_alter(&amp;$form, &amp;$form_state, $form_id)


Where you replace MODULE_NAME with your module's name.
Although maybe you only had it that way for this post.

Also, regardless of the method you use to show the user_login_block form, it already has its own validation functions that come with it. It already has these three validation functions:
http://api.drupal.org/api/drupal/modules!user!user.module/function/user_login_name_validate/7
http://api.drupal.org/api/drupal/modules!user!user.module/function/user_login_authenticate_validate/7
http://api.drupal.org/api/drupal/modules!user!user.module/function/user_login_final_validate/7  

With the last of those doing (among other things) essentially the same validation your custom function is trying to do.

You can still use the form alter to add your attributes and change titles, etc. 
In this case though the module weight does not matter.
It only matters if two modules are both using hook_form_alter() and are changing the same parts of the form.