Now that the National Asset Management Agency (Nama) has been passed by the Dail and the banks can offload their biggest property loans to the agency at exorbitant prices, lenders will turn their attention to the thousands of other customers who are struggling with their repayments. And that’s where the real problems may begin.

This growing category includes many who bought overpriced houses and apartments in recent years with monster mortgages pushed on them by the same banks now doing business with Nama.

Many of these homeowners face financial ruin because of falling incomes and unemployment. In the worst cases, they will lose their homes. It might not be bad now, but the situation will worsen considerably as interest rates eventually move upwards and the supports on which many depend, such as child benefit, are slashed in the budget.

Even those who don’t lose their homes may suffer. They could find themselves spending up to 40 years stuck in the same property with no prospect of trading up, dedicating their working lives to repaying more money to the bank than their so-called “asset” will ever be worth.

The manner in which the banks treat these people will be telling. Last week, the Irish Banking Federation issued details of a voluntary code of practice to which 10 member institutions have subscribed. It urged borrowers to own up to potential repayment problems quickly and suggested loan restructurings would be offered. It promised at least a six-month window before any legal action was initiated that could result in repossession.

When banks appear to act generously, we should be alarmed. It was the “generosity” of the banks in issuing large loans, sometimes for seven or eight times one’s income and for terms considerably longer than the traditional 20 years, that got many people into trouble in the first place.

The mess we’re in can be put down to the banks suckering their ordinary customers into a giant Ponzi scheme. Crazy sums of money were lent to land speculators who borrowed even more to build properties. To recover their money, the banks lent enormous sums to the people who then bought those properties.

Everything went smoothly for the banks and developers — at least for a time — but then the scheme, as they always do, imploded. At the end, it was the ordinary home purchaser who got caught.

Banks will seek repayment of every last cent from these borrowers, irrespective of the ability to pay as they no longer have to worry about the developers, who will be hunted down by Nama instead.

The banks like hitting on easy marks. The big developers can put up a better fight, some have cash stashed away and access to top lawyers and financial advisers. Many developers haven’t paid interest on their loans for years, but none of them has been turfed out of their homes. Anglo Irish Bank’s decision to go after hotelier Hugh O’Regan for €37m in personal guarantees is an exception, but there are better-known customers of Anglo and other banks with far bigger liabilities who have not been chased with the same determination.

Despite all the promises contained in the advance publicity, it is unlikely that Nama will be able to enforce full repayment of the loans it is acquiring. Settlements will be reached with major borrowers, with part of the debts “written off” as unrecoverable, giving these entrepreneurs another chance to get back on the merry-go-round.

That’s what happened with Larry Goodman in the early 1990s. Bust after his disastrous investments and trading mishaps, the banks did a deal which required him to repay only a fraction of what he owed. Little more than a decade later, he had repurchased all the properties he had surrendered and was in control of the Irish and British beef industry.

The more you owe, the more likely it is that a bank will do a deal to ensure at least partial repayment. Owe a relatively small amount, however, and you will be pursued ruthlessly.

Property mortgages (excluding commercial buildings) totalled €113 billion at the end of June. Excluding the €30.67 billion lent to buy-to-let investors and the €1.25 billion advanced to holiday-home owners, the amount of money lent to owners of principal private residences was €81.73 billion, down from a peak of €89.77 billion in March 2008.

Recent figures from the Central Statistics Office suggest that 60% of homeowners in Ireland have no mortgages. That means that €81.73 billion is spread among less than half the homeowners in the country. I’ll bet that most of these borrowers are relatively young, and most will have families. Many of them also have credit-card debts and personal loans for cars, an absolute necessity in order to commute from their expensive homes in some out-of-the-way place.

These are the same people who are suffering disproportionately from the surge in unemployment and reduced incomes. All they can do is stand and watch as those who never bothered to provide for themselves are handed rent subsidies and other state supports.

Everyone accepts that taking on debt involves personal responsibility, but many of these people were simply seduced by banks and the government with their offer of tax incentives to get into the property game.

Every day, we hear about the state of the public finances, but nothing is being done to sort out the personal-debt crisis that threatens to make this recession far worse than the one experienced in the 1980s. There will be no meaningful recovery unless we do something to bail out people crippled by their mortgages.

The banks may be playing it nice at present, but wait until Nama removes the €77 billion in developers’ loans from their books. It seems only fair that with the banks being paid €54 billion for loans currently valued at €47 billion, there should be something in this for the small borrower too.

No doubt economists and others will reject this idea as unsustainable, but why not require the government to step in and write down all existing mortgages on principal private residences by 10%? The cost to the state would be just over €8 billion, a little more than the known overpayment that the banks are receiving for the dodgy loans being parked in Nama.

The impact on the personal finances of mortgage holders would be enormous. They would have less money to repay, and loans could even be spread over a longer period of time if the banks were to play ball. The measure wouldn’t solve everyone’s problems, but this stimulus would give borrowers some badly needed breathing space.

In the absence of an initiative such as this, personal debt, as with public debt, will continue to choke any hopes of an economic recovery. The gesture would also make it easier to sell the pay reductions that are now deemed essential if we are to restore national competitiveness.

matt.cooper@sunday-times.ie

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