Wolverhampton City Council has become the second authority in the West Midlands to stop taking asylum seekers.
The council, which provides 124 homes, will withdraw from its contract with the UK Border Agency (UKBA) in June 2011.
On Friday Birmingham City Council, part of a consortium with Wolverhampton, Dudley and Coventry, also withdrew from the agreement.
Dudley and Coventry councils have said they will remain in the consortium.
Coventry and Dudley provide 74 and 73 homes respectively.
Councillor Les Pugh, cabinet member for adults at Wolverhampton City Council, which currently has no party in overall control, said it had been a difficult decision to make but one that was in the interests of local people given the pressures on the housing list.
He said there were currently 13,405 people on the waiting list for council housing, of which 6,868 were in "housing need".
The UK Border Agency's regional director said it was "disappointed" at Wolverhampton's decision.
Dudley Council has said it will remain in the consortium until at least June 2012 while Coventry said it would honour its present commitment.
Councillor Tony Skipper, cabinet member for housing at the Labour-led council said: "Birmingham was a key part of the consortium and it appears to me irresponsible to withdraw from this obligation at the last minute.
"I cannot accept asylum seekers being used as a scapegoat for anticipated cuts in Government funding for future house building."
Birmingham Council has said it needs its properties for its "own people".