As foreclosures began to mount across the country three years ago, a group of state bank regulators suspected that some borrowers might be losing their homes unnecessarily. So the state officials asked the biggest national banks for details about their foreclosure operations.

When two banks - J.P. Morgan Chase and Wells Fargo - declined to cooperate, the state officials asked the banks' federal regulator for help, according to a letter they sent. But the Office of the Comptroller of the Currency, which oversees national banks, denied the states' request, saying the firms should answer only to inquiries from federal officials. In a response to state officials, John Dugan, comptroller at the time, wrote that his agency was already planning to collect foreclosure information and that any additional monitoring risked "confusing matters."

But even as it closed the door on state oversight, the OCC chose itself not to scrutinize the foreclosure operations of the largest national banks, forgoing any examination of their procedures and paperwork. Instead, the agency relied on the banks' in-house assessments. These provided no hint of the problems to come until they had tripped the nation's housing market, agency officials later acknowledged.

"Based on what we were seeing and what we were concerned about, it felt like a chronic underreaction at the federal level," said John Ryan, a senior official with the Conference of State Bank Supervisors.

Even when the mortgage industry itself identified possible flaws in foreclosure paperwork, the agency was slow to act. In September, Ally Financial suspended foreclosures after discovering problems with tens of thousands of cases. But even then, the OCC did not begin to examine the operations of other major banks. Instead, the agency asked them to undertake internal reviews and told them it would conduct its own examination later, an OCC official said.

Over the following weeks, most of the major national banks announced one after the next that they were reviewing their foreclosure practices and putting thousands of cases temporarily on hold. While the freeze offered new hope to thousands of distressed borrowers, it also threatened to undermine the real estate market, which was already struggling to recover from crisis.

Two weeks ago, for the first time, the OCC began sending its staff into the banks to examine their foreclosure operations, interview bank employees and review paperwork.

The OCC is one of the nation's four federal bank regulators and has primary oversight over the largest banks, while the other three - the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision - share responsibility for many small and medium-size financial firms. All the agencies failed to spot problems in the foreclosure process.

The OCC's recent initiative is part of a broad federal effort to assess the U.S. foreclosure breakdown. Regulators said they hope to complete a preliminary report this month but have not decided whether it will be made public.

In monitoring the financial health of banks over the years, the OCC had been far more aggressive. Agency staff members have been assigned to work full time inside the largest banks, checking to see whether the banks are taking excessive risks, for instance, by analyzing their holdings.

But the agency did not look closely at how banks foreclose when borrowers don't make their mortgage payments. OCC officials treated foreclosures as the simple act of filing documents to seize ownership of a home once a borrower couldn't pay.

"We looked at the final stage of the process and thought of it as one that would be governed by standards and procedures in internal controls," said Julie Williams, the OCC's top lawyer. "You would only be able to know for sure if there was a problem with the document-signing process if you were standing in the room watching someone sign documents. That is not traditionally part of the bank examination process."