It has also reduced its net lending forecast from £15bn to £12bn.
It says in the next few months, it expects a continuation of the recent picture of relatively modest lending levels, with less of a pick up in the second half of the year than it previously thought.
As a result, overall, it expects both gross and net lending levels to be at or below 2009 levels.
It says this reflects stability but at well below what might be expected to be a normal level of market activity of around £250bn.
With remortgage activity likely to remain subdued for some time yet, and housing turnover to remain at low levels, it says gross lending will remain much lower than it was in the years preceding 2007.
At the same time, demand for finance remains subdued. So there is unlikely to be much increase in outstanding mortgage balances over the next few years, and it says the possibility of a decline cannot be ruled out.
The CML says at the same time, and more positively, historically low interest rates and the labour market having held up better than expected so far have continued to help many households cope.
This has kept mortgage problems lower than expected, with more people with short term financial difficulties being able to get back on their feet. This means that both arrears and possessions levels are expected to be materially below 2009 levels at the end of the year, rather than above as previously forecast.
It believes the recovery in the housing market over the second half of last year has run out of steam in early 2010 and prices look to be broadly stagnating following a rise over the latter part of last year.
But, overall, it anticipates little change in housing market turnover over the latter part of this year. 2009 saw a post-war low in housing transactions. It forecasts only a modest rise for 2010 as a whole, and expect turnover to remain low for some time with a real potential for a further drop if some of the downside risks materialise.
The trade body says lenders still face considerable funding uncertainties as they look to refinance wholesale assets when official support schemes start to be unwound from next year and existing funding lines come up for refinancing.
The CML, says: “The Bank has said it will not extend the Special Liquidity Scheme, and estimated in the Financial Stability Report that the financial sector has around £800 billion to refinance over the next 30 months. At the same time, spill-over from the European sovereign debt markets has not helped the mood in the wholesale markets.
“The FSR showed that the Bank has concerns about firms’ ability, in aggregate, to raise sufficient funds given the economic backdrop limiting how much households are able to save. We share that concern and, at this stage, believe the funding gap could impact on market activity. However, it is difficult to assess how, and to what extent, as the current situation is unique.
“The prospect of tighter prudential regulation over the longer term, with the need to shift to more longer-term funding sources, and the inevitable increase in costs and diminished capacity to lend this will bring, will put further pressure on lenders’ ability to increase the flow of credit into the mortgage market back to more normal levels.”
It says meanwhile, the Mortgage Market Review could have significant impacts on lenders’ appetite to lend and the price of mortgage credit in the future, as they anticipate and respond to the switch in regulatory responsibilities set out in the FSA’s responsible lending consultation paper.
It says as the proposals currently stand, they could permanently restructure the lending landscape, shrinking the mortgage market, restructuring relationships between lenders and intermediaries, excluding some credit-worthy potential first-time buyers, and preventing some existing borrowers from moving or remortgaging as some product types are removed from the market permanently.