Bankruptcy laws need to be updated to allow people who can't pay their mortgages a fresh start, the financial regulator said today.
Speaking in Cork this afternoon where he was addressing compliance officers, Matthew Elderfield said reform of laws and procedures is "necessary, overdue and now urgent".
"Reform of the current bankruptcy regime could, for example, allow borrowers to earn a fresh start by discharging their debt over a reasonable period of time," he said.
Nearly 5 per cent of all mortgages are in arrears of 90 days or more in Ireland, and Mr Elderfield said that figure, which does not include borrowers who have rescheduled their loans, would increase.
"It's clear that these numbers will get worse before they get better, because it will take time before economic recovery translates into higher levels of employment and therefore better ability to pay off mortgage debt," he said.
The regulator and central bank are working on recommendations to protect borrowers in arrears and will publish final proposals early next month.
Mr Elderfield said forgiving some mortgage debt for customers in arrears was not practical because the taxpayer or the banks would have to foot the bill and it could encourage risky behaviour.
Banks are currently prevented from taking legal action against mortgage holders in arrears for a period of 12 months, which has resulted in a very low rate of repossession in Ireland -- 11 per 100,000 mortgages in the second quarter of this year, compared with 82 per 100,000 in the UK.
Mr Elderfield said the low level of repossession was positive, but rating agency Moody's warned this week that Ireland's prolonged foreclosure process has created uncertainty about future losses and might increase bank losses.