THE governor of the Central Bank of Ireland has put pressure on banks to deal more proactively and liberally with borrowers in mortgage arrears.
Patrick Honohan warned that household financial distress is at unprecedented levels in Ireland.
He said new personal insolvency legislation made it more important than ever for banks to help struggling borrowers reach more sustainable debt levels.
"Banks will have to act more proactively and liberally in respect of those who cannot realistically pay, if they are to avoid the costs and inefficiencies of having to respond to PIA (personal insolvency arrangement) proposals or bankruptcy cases," Mr Honohan said.
"Given how little is often recovered by creditors from payment plans, in many if not most cases, a well-designed loan modification bilaterally arranged between borrower and insolvent debtor can be better for both than the net outcome of a PIA or bankruptcy."
The Central Bank's own figures revealed in December that more than one in 10 mortgage holders were in arrears of three months.
Some 26,770 or 17.9pc of buy-to-let mortgages were in arrears of more than 90 days at the end of September.
The bank chief told the Central Bank conference on distressed property markets that permanent debt relief must be limited to people "truly over-indebted and close to insolvency".
Mr Honohan said negative equity was not a good enough reason on its own to ease debt.
"Still, at the end of the day, most would agree that there must be consequences for an unco-operative borrower refusing to make a reasonable effort," he said.
PIA allows for a six-year arrangement between debtors and their creditors to spread out mortgage payments. Payment plans can be restructured to extend the term, meaning monthly repayments would be reduced.
The legislation also includes a new bankruptcy regime, allowing debtors back into business in three years rather than 12.
Mr Honohan said banks were behind the curve in addressing the problem of mortgage arrears.
He said while they have in some cases moved to capitalise arrears and introduced temporary interest-only payment schedules, their measures do not fully address the problem of spiralling debt.
"Such temporary forbearance measures do provide cash-flow relief to the borrower and have the considerable merit of bringing their payments back on to a schedule and avoiding the arrears spiral," Mr Honohan said.
"But they do not deal with situations where the actual and prospective circumstances of the borrower, combined with the existence of the new insolvency framework, mean that full recovery of the loan cannot realistically be assumed."