Should mortgage holders in arrears be charged a penalty?

Correct - the situation prior to many of the forbearance measures under CCMA in 2011 was far more harsh, in the absence of forbearance, moratoriums on repossession claims and obligations to propose sustainable arrangements, with lenders threatening repossession after just 6 months of arrears and refusing efforts by organisations like MABS efforts to propose sustainable repayments. The reason banks had adopted "wait & see" policies after 2008 was because of the number of such borrowers being also in negative equity.
 
Actually, it hasn't been banned. I misread the CCMA.

Brendan
Its not banned, but lenders were obliged to adopt a 12 month moratorium on repossessions on primary residence mortgage arrears. Previously they would start threatening this after 6 months in arrears. You are correct about demands for debt forgiveness though.

Of course none of this applied to BTL, so banks were already chasing such borrowers, many of whom also had distressed borrowings on their PPRs.
CCMA dates back to 2013, we kind of went back to the "wait and see" approach both lenders and borrowers were following after that. I'm guessing because the primary solution chose to resolve everything was to restore full employment. You can kind of see why packaging off non performing and riskier loans became the preferred option - it reduced the level of effort such lenders had in trying to manage such loans. I recall KBC having a huge team mainly contractors on 3 month terms working on arrears circa 2014, and the staff told me BOI had even more contractors working in a dedicated unit on distressed mortgages.