Sept. 23 (Bloomberg) -- State foreclosure-prevention programs have failed to save borrowers from losing their homes and haven’t improved their chances of modifying loans, a consumer advocacy group’s study found.

“There is as yet no data to confirm that foreclosure mediation programs anywhere have led to a substantial number of affordable and sustainable loan modifications,” according to the report released today by the Boston-based National Consumer Law Center. “Existing programs fail to impose significant obligations on mortgage servicers. Without the imposition of these obligations, it is unlikely that mediations will lead to fewer foreclosures.”

To combat record-high foreclosure rates, 14 states have initiated more than 25 different mediation initiatives since the middle of last year, according to the report. The study was financed by the Open Society Institute, a nonprofit supported by George Soros, chairman of New York- based hedge fund Soros Fund Management LLC.

One in 10 mortgage borrowers in the U.S. is behind on payments and one in every 25 homes is in foreclosure, Michael Williams, chief executive officer of Fannie Mae, the government- controlled mortgage-finance company, said in a speech on Sept. 9 in Washington. Homeowners have lost 40 percent of their equity, making refinancing more difficult, he said.

‘Not Set in Stone’

“These foreclosure programs are early in the process; these programs are not set in stone,” said Heather Morton, spokeswoman for the National Conference of State Legislatures, in an interview. Lawmakers “can always go back and make changes to make it work.”

Lawmakers in Connecticut made their voluntary mediation program, which began in July 2008, a mandatory part of the foreclosure process in July of this year, she said.

Lenders in that state, which requires all foreclosures to be processed through the court system, can’t seize a property before entering into mediation with the borrower and submitting a report to the court.

“Of the cases that complete mediation, 75 percent reach settlement, which I think is tremendously successful,” said state program manager Roberta Palmer. Most of the cases that complete mediation, 62 percent, reach an agreement that lets borrowers stay in their homes, she said.

‘Complete Discretion’

More than 360,000 loans have been modified since President Barack Obama launched his Making Home Affordable Program in March. The study faulted that program and other federal proposals because they are voluntary and don’t force mortgage servicers to modify loans.

“Since the beginning of the foreclosure crisis, the industry has tried systematically to defeat and evade every enforceable obligation related to implementation of loan modifications that anyone has attempted to impose upon it,” according to the study. “These programs invariably allowed servicers to exercise complete discretion in deciding whether to modify a particular loan.”

The success of the Obama program hasn’t been documented. Data released by Treasury earlier this month didn’t include re- default rates, when a borrower falls behind on their mortgage after receiving a loan modification.

Washington-based Fannie Mae, which is helping to administer the Obama program, reported last month that 41 percent of the loans it modified in the fourth quarter of last year were current or had been paid off, indicating a failure rate of about 59 percent before it implemented Obama’s home-mortgage plan.

Reliance on Programs

Without requiring more from servicers, the programs “will become another piece of imagery the industry uses to support its claims that voluntary efforts work, that statutory and other government mandates for loan modifications are unnecessary and that jargon about the benefits of communication can solve the foreclosure crisis,” according to the report, written by Geoff Walsh, a staff attorney at the Law Center.

Williams said on Sept. 9 that the mortgage market is still dependent on government-affiliated programs, with private banks providing just 10 percent of loan liquidity, less than about 60 percent in 2006. Fannie Mae and its counterpart Freddie Mac are responsible for about 70 percent of all new mortgages, while the Federal Housing Administration accounts for about 20 percent, Williams said.

‘Imminent Risk’

Foreclosures will climb this year, Williams said, putting pressure on home prices as mortgage companies work through a backlog of property seizures that had been suspended this year as part of efforts to provide struggling homeowners with relief. While homes are selling faster, the inventory of foreclosed properties and unsold homes remain at “exceptionally high levels,” he said.

Some borrowers have lost too much equity in their homes to qualify for government programs to refinance into lower rates. More than 1 million delinquent loans are ineligible for Obama’s loan modification program because the debt was used to finance second homes or exceeds the program’s loan limits of $729,750.

The program encourages banks that received federal aid from the Treasury’s Troubled Asset Relief Program, or TARP, as well as Fannie Mae and Freddie Mac to lower monthly payments for borrowers at “imminent risk” of default.

Banks can lengthen repayment terms, lower interest rates to as low as 2 percent and forbear outstanding principal, among other methods.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.com.

Last Updated: September 23, 2009 16:39 EDT