The government is working on a plan to ease the lending log-jam
Mortgage lending rose slightly in March but the Council of Mortgage Lenders (CML) is predicting falls during the rest of the year.
Gross lending rose by 5% from £25bn in February to an estimated £26.3bn in March, the CML said.
But lending in the first three months of the year was down by 8% compared with the first quarter of 2007.
The CML said it was "eagerly anticipating" further action by the Bank of England to help the market.
Although the monthly figure increased, the CML said that lending was typically expected to lift by a fifth from February to March.
The March figure was the highest since November but still down 17% from £31.7bn in March last year.
"Lending on completed transactions is currently running at levels considerably lower than a year ago," said Michael Coogan, CML director general.
"However, the picture for mortgage approvals for new business and prospective lending levels in the next few months is worsening."
These are the first figures released since the CML's chairman Steven Crawshaw warned in a speech that mortgage funding could be cut by half in 2008 if no extra funding came from the Bank of England.
Mr Crawshaw said that lending at just 50% of the 2007 figure of £108bn was a "real possibility".
The figures do not show the effect of the cut in base rates to 5% from 5.25% in April.
The figures are from a period before the latest cut in interest rates
Sixteen lenders, including the major players in the market, have passed on the cut in full to borrowers on variable rate mortgages but the cost of some fixed rate and tracker mortgages was put up for new customers.
Mortgage providers have tightened up on lending because the banks have not been keen to lend to each other.
The number of mortgage products on the market has now dipped to 3,939 as a result of the current climate, according to financial information service Moneyfacts.
That is a dramatic drop compared with the 13,428 products available in April last year.
Help at hand?
The BBC learned on Wednesday that in a bid to trigger movement in lending between banks again, the government is working on a programme that could be in place by next week.
The scheme would temporarily allow banks to swap their mortgage-based assets for government bonds.
"We await the eagerly anticipated announcement of further action by the Bank of England to respond to these rapidly worsening market conditions," said Mr Coogan.
"Early action is needed if we are to be able to maintain a market in which UK borrowers continue to be able to access mortgage funds at reasonable prices."
He urged any homeowner getting into financial trouble owing to increasing mortgage costs to contact their lender straight away, before they missed any payments.
"The CML data highlights the need for concerted, sustained action to try to get banks to lend to each other, so that more liquidity is available to fund mortgage lending and market interest rates come down," said Howard Archer, chief UK and European economist at Global Insight.