A government plan to ease the mortgage crisis by using taxpayers' money to bail out those in mortgage arrears has sparked a furious backlash.

The proposal to offer State support to homeowners who cannot afford to repay mortgages has been blasted by Fianna Fail finance spokesman Michael McGrath as "another bailout of the banks by responsible taxpayers".

The controversial idea is being considered as part of a series of measures in a package the Government is finalising to deal with the mortgage-arrears crisis.

Under the proposal, the Government would offer ongoing State support to homeowners who cannot afford to repay their debts in order to allow them to retain ownership of their properties.

Banks would have to agree to restructure the mortgage. In return they would receive a State top-up repayment. The proposal would effectively mean that heavily indebted taxpayers, who are already repaying their full debts, would then have to bail out borrowers in arrears.

"The State has to be conscious of the many thousands of families who are meeting their mortgage repayments through great sacrifice. Any scheme providing direct support would have to be very carefully constructed," Mr McGrath told the Sunday Independent.

"Such a policy is letting the banks off the hook again, it is a direct transfer from the taxpayer to banks which have already been handsomely capitalised at the same taxpayer's expense," he added.

He said Fine Gael and Labour "need to learn" that resolving mortgage arrears is the banks' responsibility, not the taxpayers.

Mr McGrath said the Government's proposal was in stark contrast with the decision to abolish the Mortgage Interest Supplement for hard-pressed taxpayers paying their mortgages.

However, senior government sources claimed the Coalition and the banks were on a major collision course over the escalating mortgage arrears crisis. One senior source warned the banks were using the veto in a "most vexatious manner" and "they are running out of road".

Meanwhile, former Communications Minister Pat Rabbitte said banks bear the majority of the responsibility to resolve the mortgage arrears crisis, but insisted the Government needed to act soon to address the issue facing thousands of families.

"Failure to resolve the mortgage arrears crisis will present the Coalition with an appalling social and political vista. No government can withstand a situation where 30,000 people may face court action and repossessions," Mr Rabbitte told the Sunday Independent.

Mr Rabbitte claimed the biggest problem was the collapse of social housing programmes under Fianna Fail.

"We simply have no places to put 30,000 families, there are no houses available for this. The normal outlet for these unfortunate families, whose house has been repossessed, was to receive council housing, but this is only exceptionally available," he said.

He said banks will have to come to arrangements that will allow people stay in their homes. Mr Rabbitte warned that any attempt by Fine Gael to water down plans, led by former Labour cabinet Minister Willie Penrose, to reduce Ireland's bankruptcy term from three to one year, would cause serious political trouble.

Sunday Independent