UPDATE 1-Irish mortgage arrears grow sharply in Q4
* Nearly one in seven home loans not being fully repaid
* Rate of deterioration increases
* Analysts waiting for results of new insolvency rules
DUBLIN, Feb 17 (Reuters) - The number of problem mortgages in Ireland grew sharply in the last three months of 2011, putting further pressure on its banks and highlighting the challenges the government faces in reviving the moribund domestic economy.
Nearly one in seven Irish home loans are not being fully repaid and repayment is getting more difficult as unemployment remains stubbornly high and house prices continue to fall, figures from the Central Bank showed.
"It's a worrying trend, what we're seeing now is a faster pace of deterioration than any kind of stabilisation," said Dermot O'Leary, chief economist at Goodbody Stockbrokers.
Stress tests carried out as part of Ireland's EU-IMF bailout have bulked up Irish banks' balance sheets to deal with rising arrears, based on an assumption that 6.7 percent of their combined mortgage book would never be paid back.
But a report from the European Commission warned last year that there was potential for higher-than-anticipated losses.
The central bank said 107,708 mortgages were either in arrears or had been restructured at the end of December, up from 99,346 mortgages at the end of September. That represents some 14 percent of the total residential mortgage market.
The proportion of loans in arrears for more than 90 days was 9.2 percent at the end of December, up from 8.1 percent at the end of September. The deterioration increased to 110 basis points from 90 basis points in each of the previous two quarters.
The figures only include owner occupiers and not investors who bought properties to rent out, which represent some 22 percent of outstanding mortgages according to research carried out by the central bank last year.
The government, which needs the economy to grow to help it cut its own mountain of debt, announced proposals in January for new personal insolvency and bankruptcy regimes, which it hopes will address the mortgage arrears problem.
But insolvency experts have said it is too soon to say how the new rules, which have not been finalised, might help.
"It is difficult to extrapolate too much from these figures as to the likely effect for the banks' balance sheets given that frustratingly buy-to-let, which is the most distressed segment of their mortgage books, is not included," said Stephen Lyons, a credit analyst at Davy Stockbrokers.
Highlighting the level of forbearance being shown by lenders, repossessions since the central bank started issuing data in late 2009 stood at just over 1,000 at end-December, far below the 40,000 repossessions assumed in the stress tests.