UPDATE 1-Irish mortgage arrears worsen in Q2
* Loans in arrears for 90 days-plus up to 7.2 pct
* Govt has promised to look at mortgage problems
* Retail sales fall in July, property prices down again (Adds detail, analyst quotes)
DUBLIN, Aug 29 (Reuters) - Irish residential mortgages in arrears or restructured due to financial distress rose 10 percent in the second quarter from the previous three months, heaping pressure on the government to come up with a solution for struggling homeowners.
More than one in ten Irish home loans are not being fully repaid and the situation is deteriorating as the rate of unemployment remains stubbornly high and house prices continue to fall, marking a three-and-half year decline.
Stress tests carried out as part of Ireland's EU-IMF bailout have bulked up Irish banks' balance sheets to deal with rising arrears but Prime Minister Enda Kenny, who returns to work on Tuesday from his summer break, is under pressure to alleviate the burden for homeowners.
"We're seeing a worsening pace. Over the past two quarters the rate of deterioration has worsened which is a slightly worrying sign," Dermot O'Leary, chief economist at Goodbody Stockbrokers said.
"It's still within the realms of the stress tests carried out earlier on in the year but the trend from quarter to quarter is something to watch very, very closely."
The central bank said on Monday 95,158 mortgages were either in arrears or have been restructured at the end of June, representing some 12 percent of the total residential mortgage market.
The proportion of loans in arrears for more than 90 days was 7.2 percent at the end of June, up from 6.3 percent at the end of March. Nearly three quarters of those were in arrears for over 180 days.
A SENSITIVE ISSUE
Stress tests published last March that forced Irish banks into a 24 billion euro recapitalisation assumed that 6.7 percent of their combined mortgage book would never be paid back.
Ireland's ruling coalition has promised to examine ways to ease the burden on mortgage holders in arrears but it is waiting for an expert group's report on the issue, due to be published at the end of next month, before making any major decisions.
The Irish Times reported on Monday that Dublin was considering creating an agency with legal powers to enforce debt restructuring agreements between banks and struggling home owners.
Ministers have, however, ruled out a blanket debt forgiveness programme for fear of the potential cost and the risk it would encourage people not to pay off their debts.
"It's a very sensitive issue but something has to be done about it and I think while the government will look at it, they'll have to tread very carefully in how they address it," Alan McQuaid, chief economist at Bloxham Stockbroker said.
"You need to come up with a solution that pleases everybody in terms of the taxpayer, those people who are trying to pay their mortgages and those who are having difficulty paying them."
Separate data released on Monday showed retail sales fell 0.6 percent year-on-year in July and that property prices tumbled for the 42nd straight month after a 0.8 percent dip last month, highlighting how brittle the domestic economy is.
Ireland is hoping its booming exports ensure it clocks up its first year of economic growth since 2007 this year but needs consumer spending to stabilise next year if it is to meet growth targets under its EU/IMF agreement.
While the annual trend in core retail sales -- a figure that excludes car sales -- improved for a second month running, economists said the underlying drivers of consumer spending remained weak.
Ireland's Credit Review Office also said on Monday that Allied Irish Banks and Bank of Ireland , the country's two main lenders, were unlikely to meet a government target for them to each lend 3 billion euros in new and restructured loans to small and medium-sized businesses this year due to week demand.
"Put them (the three pieces of data) all together and it gives you a very good picture of what's going on in the domestic side of the economy and the difficulties consumers have gone through in recent times," McQuaid said.
"We've had a lot of good news, things have started to develop with regards to the bond yield... Unfortunately the domestic side of the economy isn't going to improve in the near term but I think overseas investors know that." (Editing by Carmel Crimmins; Editing by John Stonestreet)
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