UPDATE 1-Irish regulator says banks make progress on mortgage arrears
* Elderfield says arrears situation still short of ideal
* Arrears continue to rise, but within stress levels
* Outlook difficult on profitability, progress will be slow
DUBLIN, Feb 22 (Reuters) - Ireland's banks have made big improvements in preparing to deal with the problem of mortgage arrears but the situation is still short of ideal and they need to deliver results now, the country's head of financial regulation said on Friday.
Ireland's almost fully state-owned and heavily recapitalised banks have been slow to deal with residential loans imperilled by high unemployment and falling house prices, and have faced tough criticism from the central bank.
The regulator, Matthew Elderfield, who called a year ago for lenders to make substantial progress on arrears, struck a rare positive tone in his assessment of what he described as an intense period of engagement with the banks, involving a series of reviews.
"While the situation is still short of ideal, this has led to significant improvements from where the system was 15 months ago and so now is the time to see real delivery," Elderfield said in a speech, referring to the banks' strategies on arrears.
"It is important that this involves a more realistic mix of solutions for borrowers."
The proportion of residential mortgages in arrears for more than 90 days was 11.3 percent at the end of September. While Elderfield said arrears continued to rise, it was at a slower pace and remained within stress levels earmarked in strict tests two years ago.
Elderfield, who is also a deputy governor at the central bank, added that there had been some encouraging signs for the country's banks, pointing to recent private investment in Bank of Ireland and a limited return to debt markets by lenders.
However he said the outlook for making the banks profitable again, something he described as an essential part of Ireland's economic recovery, remained difficult because of low margins and weak domestic economic activity.
"Clearly the path ahead remains a difficult one and progress will inevitably continue to be slow given the significant dislocation that has occurred to the banking sector and the economy as a whole," he said.
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