The mortgage arrears crisis here shows that household financial distress is at unprecedented levels according to the Governor of the Central Bank.

Patrick Honohan has said long-term debt modification involving permanent debt relief is necessary but should not be widespread.

Governor Honohan says most people in Ireland believe that they should service their loans and are doing that.

"Household financial distress is at unprecedented levels in Ireland as can be seen, for example, from the extraordinary rates of arrears on the servicing even of mortgages secured on owner-occupied homes" he said.

However he says the banks have not done enough for distressed borrowers and the Central Bank will be setting expectations for lasting solutions.

"To date, the banks have dealt with the emerging situation largely by means of two devices: capitalisation of arrears and a temporary move to an interest-only payment schedule. Such temporary forbearance measures do provide cash-flow relief to the borrower and have the considerable merit of bringing their payments back onto a schedule and avoiding the arrears spiral" he continued.

'Repossession should be avoidable'

"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".

"Of course, permanent debt relief is not something that will be offered to all of those who have suffered a loss of wealth, but has to be limited to those who are truly over-indebted and close to insolvency. In particular negative equity is not in itself a rationale for debt relief" he added.

But he also believes that "while repossession may be inevitable for many investment properties, it should be avoidable for the majority of owner-occupier cases where the distressed over-indebted borrowers - often suffering from unemployment - are doing their best".

At a conference on distressed property markets this morning Mr. Honohan said negative equity is not in itself a rationale for debt relief.

Newstalk's Business Editor Ian Guider has been analysing his comments.