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The state attorneys general are looking at allegations some banks did not properly review files or submitted false statements to evict delinquent borrowers from their homes during a foreclosure crisis that is one of the most visible wounds of the 2007-2009 recession.

"We are in the fourth year of a housing and economic crisis that was brought on by lax practices of the mortgage lending industry," Minnesota Attorney General Lori Swanson said.

"The latest allegations of corner-cutting and slipshod paperwork are troubling, but perhaps not surprising."

Iowa's attorney general, Tom Miller, told Reuters the states were seeking redress for affected homeowners and financial penalties "where appropriate." They might also press lenders to change procedures and modify loans for people struggling to make mortgage payments, he said.

Industry analysts warn the investigation could slow foreclosure proceedings. One of every four homes sold in the second quarter was a foreclosed property and any slowing could have an impact on the broader economy, as the housing market traditionally drives recoveries after a downturn.

Underscoring those concerns, the regulator for the government-owned mortgage finance giants Fannie Mae and Freddie Mac called on mortgage servicers not to slow down foreclosure cases that had clean paperwork.

The United States has an $11 trillion residential mortgage market.

The paperwork controversy has refocused attention on the foreclosure crisis just weeks before the November 2 congressional election in which Democrats look likely to suffer major losses due to voter unhappiness over President Barack Obama's economic policies.

The White House has endorsed the investigation by the states but rebuffed calls by some senior Democratic lawmakers and others for a temporary nationwide moratorium on foreclosures, fearing it would do more harm than good.

Miller said the attorneys general were "very conscious of the broader housing market issues and the broader economy issues."

"ROBO-SIGNERS"

The states are investigating the use of "robo-signers" -- people who sign hundreds of affidavits a day -- by banks and companies that collect monthly mortgage payments. It is alleged they did not properly review the documents they were signing.

"What we have seen are not mere technicalities, as some suggest," Ohio Attorney General Richard Cordray said.

Sheila Bair, chairman of the Federal Deposit Insurance Corp told a conference in Washington that robo-signing was a "serious matter" for the entire mortgage industry. It was the first public comment by a bank regulator on the controversy.