DUBLIN, Oct 15 (Reuters) - Ireland's bankruptcy laws need to be updated to allow people who can't pay their mortgages a fresh start, the financial regulator said on Friday.
A spectacular property binge and crash followed by soaring unemployment have left many Irish people struggling to repay home loans, but few declare themselves bankrupt because it can take up to 12 years to clear their debts.
"Reform of our bankruptcy laws and procedures is necessary, overdue and now urgent," Matthew Elderfield said in a speech to compliance officers in the southern Irish city of Cork.
"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."
Nearly 5 percent of all mortgages are in arrears of 90 days or more in Ireland, and Elderfield said that figure, which does not include borrowers who have rescheduled their loans, would increase.
Between 2004 and 2006, when a booming Ireland was styled the "Celtic Tiger", its mortgage debt increased at three times the annual rate of the euro zone.
Around 80 percent of Irish mortgages are on variable interest rates, so when the European Central Bank starts raising rates, possibly next year, hard-pressed borrowers will be squeezed further.
Ireland's regulator and central bank are working on recommendations to protect borrowers in arrears and will publish final proposals early next month.
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.
Irish 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.
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. (Reporting by Carmel Crimmins; Editing by Will Waterman)