Several lenders have yet to decide whether to pass on base rate cuts
Mortgage funding could be cut by half in 2008 if no extra funding comes from the Bank of England, says the Council of Mortgage Lenders' (CML) chairman.
Steven Crawshaw, in a speech at the CML's annual lunch, said that lending at just 50% of the 2007 figure of £108bn was a "real possibility".
In October the group predicted a 15% slowdown in net lending, but now supply has been hit by the credit crunch.
Lenders have been withdrawing products dramatically in recent weeks.
'Sense of shock'
The CML chairman said there had been slightly lower demand for mortgages since the October prediction but lenders were now facing real constraints on collective access to funds.
"I have a sense of shock at how deeply our successful industry has already been hit by these unprecedented funding market conditions," he said.
"Potential borrowing still significantly exceeds the industry's collective capacity to supply funds.
"It is therefore a real possibility, looking forward from today, that net lending in 2008 could reach only half last year's level unless additional funds become available. But it doesn't have to be that way."
He called on the Bank of England to take "broader action", such as putting incentives in place for pension funds to buy mortgage-based securities, to kick-start the market.
"Without attracting new funding sources, we will see an ongoing process of attrition in mortgage choice, possibly over a protracted period, with lenders managing down demand by tightening lending criteria, increasing price, or withdrawing more products from the market altogether," he said.
The latest figures from the CML on Monday showed the number of mortgages being lent for house purchase fell to its lowest level for 16 years in February.
There were just 49,000 loans made to home buyers in February, 3.5% lower than in January and 33% down on February last year.
The CML's mortgage figures for the three months to February, at a combined 163,000, are the lowest for any quarter since early 1992 during the depths of the last recession.
The Bank of England's Monetary Policy Committee reacted to the housing market slowdown with a cut in interest rates on Thursday.
Thirteen mortgage lenders, including the biggest lenders, have announced they are cutting their standard variable mortgage rates by the full quarter of a percentage point following the Bank of England's cut in base rates to 5%.
Many others say they will take more time to decide.