LONDON, Jan 22 (Reuters) - Ireland's central bank may give lenders more freedom to chase homeowners who default on mortgages in an attempt to beef up their timid response to a crisis that threatens the country's recovery, a central bank source said.
Irish mortgage arrears have risen to record levels, with one in six home loans not being fully repaid, as one of the biggest property bubbles in Europe unwinds.
But local banks, which are predominantly state-owned, have largely held off repossessing properties and writing off the loans to avoid hitting their balance sheets and provoking a public backlash.
Avoiding the problem could delay Ireland's exit from an EU-IMF bailout and leaving it too long to deal with arrears could hike the eventual cost to the banks.
A source in the central bank told Reuters that it was considering relaxing a 2010 rule that limited the number of times a bank can contact struggling borrowers to three per month.
"We're not seeing harassment, if anything people (at the banks) are being very timid and not delving into levels of income and spending (put forward by borrowers)," said the source. "If anything, they are being too tame."
The source said that some borrowers were abusing the current system by answering the phone and promising to get back to the bank - but never returning the call.
"We're thinking about whether we should relax the three contacts rule and go for a more principle-based approach," said the source.
A spokeswoman for the central bank declined to comment on any potential change, but confirmed that a consultation paper on the existing rules would be issued "in the coming weeks."
"We believe that early, proactive and positive contact is key to assisting the borrower and lender to discuss and agree the best solution and outcomes to an arrears situation," she said.
Consultation papers are typically open for several months, and attract views from banks and consumer groups, which then inform the final rules.
Any backlash against changes to allow banks to get tougher with struggling homeowners would put pressure on the government, which has already had to push through several austerity budgets to help fund its support for the banks.
Two of Ireland's biggest mortgage lenders - AIB and Permanent TSB - are virtually nationalised, while another major player, Bank of Ireland, counts the state as a 15 percent shareholder.
Reporting By Laura Noonan; Editing by Carmel Crimmins and Erica Billingham