ORLANDO, Fla. — Mortgage lending in the U.S. is expected to drop 18.7 percent next year as borrowing costs rise, cutting into the demand for housing and mortgage refinancings that helped drive the real estate boom, a mortgage banking industry trade group said this week.

The Mortgage Bankers Association, at its annual meeting Tuesday, said it estimates that mortgage lending will drop to $2.26 trillion in 2006 from this year's expected $2.78 trillion.

The expected drop in mortgage lending likely will coincide with fewer home sales and will slow down the pace at which home prices rise, the group said.

According to the MBA, mortgages underwritten for consumers buying homes will total $1.47 trillion next year, down from $1.49 trillion this year. This drop comes as sales of new homes are expected to fall 3 percent and sales of existing homes are seen dropping 3.5 percent, the MBA said.

The association projects existing home sales to rise 3.7 percent this year from 2004. Sales of new homes, the trade group said, likely will have risen by almost 5 percent this year.

Refinancings of home loans — a major slice of business for lenders in recent years — will fall to $785 billion next year from an expected $1.28 trillion this year.

Prices are also expected to take a breather next year, according to the mortgage industry's trade group. Home prices, the MBA said, are expected to rise 5 percent in 2006 — less than a 10.8 percent increase in the median for existing homes expected for 2005.

Over the last four years, low borrowing costs have allowed more consumers to buy homes and to repeatedly refinance their mortgages.

But rates have been rising as the Federal Reserve has implemented a series of interest rate hikes to head off inflation.

Rates for 30-year mortgages, the most popular home loan, are expected to rise to 6.65 percent late next year from just over 6 percent now, according to economists at the Mortgage Bankers Association. By late 2007, those rates could be at 6.75 percent.

In a luncheon with reporters, MBA's chief economist Douglas Duncan warned that the Fed will be aggressive in its campaign against inflation. "They will raise rates far enough to generate a recession if they felt that was required" to prevent the emergence of inflation, Duncan said.