WASHINGTON  - President Barack Obama killed proposed legislation on Thursday that struck at the heart of growing political rage over how banks have moved to evict struggling borrowers from their homes.

The bill, which would have made it more difficult for homeowners to challenge foreclosures, came under the spotlight this week as the furor grew over disclosures that some of the biggest U.S. mortgage processors filed false affidavits in thousands of foreclosure cases.

Obama sent the bill back to the House of Representatives for further discussion on how it would affect the foreclosure crisis, one of the most visible signs of the deep economic problems gripping the country.

The chorus of calls from political leaders for a suspension of foreclosures grew on Thursday, with Senate Majority Leader Harry Reid and Representative Ed Towns, the Democratic chairman of the House Committee on Oversight and Government Reform, adding their voices.

The bill, the Interstate Recognition of Notarizations Act, cruised through the Senate last week with no public debate and could have shielded bank and mortgage processors from liability for foreclosure documents that were prepared improperly.

"We believe it is necessary to have further deliberations about the intended and unintended impact of this bill on consumer protections, including those for mortgages, before this bill can be finalized," the White House communications director, Dan Pfeiffer, said in a blog posting.

In a development first reported by Reuters, the bill would have required courts to accept all out-of-state notarizations, including those stamped en masse by computers in a practice that critics say has been improperly used to expedite foreclosure orders.

Senate Majority Leader Harry Reid, who is fighting a tough bid for reelection in Nevada, where foreclosure rates have been the highest in the nation, on Thursday called for the largest mortgage servicers to suspend foreclosures in Nevada.

And Towns, a New York Democrat, called for top mortgage lenders and banks to voluntarily halt all foreclosures in the country and asked New York Attorney General Andrew Cuomo to investigate allegations of fraud and other possible criminal activity.

"Losing a home can be one of the most traumatic experiences faced by an American family. Anyone forced to go through this process should be treated fairly. Sadly, it appears this may not have been the case for some borrowers," Towns said in a statement.

So far, Ally Financial Inc's GMAC Mortgage, JPMorgan Chase & Co and Bank of America have all announced that they are suspending some of their foreclosures to review whether they have been conducting them properly.

Wells Fargo has said that it is "confident" in its foreclosure paperwork, and Citigroup has also not announced plans to halt foreclosures despite increased pressure from state attorneys general and lawmakers in Washington.

Banks are expected to take over a record 1.2 million homes this year, up from about 1 million last year, according to real estate data company RealtyTrac Inc.

False notarizations figured in disclosures that GMAC, JPMorgan and other big mortgage processors filed false affidavits in thousands of cases, part of the wave of foreclosures that erupted in the wake of the financial and economic crisis.

The U.S. Justice Department said Wednesday it was probing reports the nation's top mortgage lenders improperly evicted struggling borrowers as growing numbers of lawmakers on both sides of the aisle demanded investigations.

The debate over foreclosure procedures comes just weeks before the November congressional elections with Obama's fellow Democrats braced for potentially big losses from voters frustrated by the slow economic recovery and punishingly high unemployment rates.

But while many householders may cheer efforts to get tough with banks, some experts say any blanket halt to foreclosures could risk further hobbling the economy as banks wonder whether they will ever claw back losses and the housing market grapples with by a mounting inventory of homes still likely to face foreclosure in future.

Billionaire investor Wilbur Ross said on Thursday the foreclosure debacle could slow the lending process, seen as key to pumping life back into the U.S. economy.

"I think it's more of a clogging of the system and introducing another note of uncertainty," Ross said at a Reuters summit on restructuring in New York.

MYSTERIOUS BILL

Obama's decision not to sign the bill capped a week which saw the legislation, passed by the House in April, suddenly pushed through the Senate Judiciary Committee and approved by the full Senate on September 27, the day before the Senate recessed for the midterm election campaign.

Passage of the bill caught homeowners' advocates, including lawyers and some state officials, by surprise with some saying the timing seemed peculiar.

The bill had received almost no public attention but stirred controversy once the Senate's rapid passage of bill became public.

Congressional staffers said many lawmakers and White House officials initially didn't realize that the bill, which nominally deals only with notarizations, could have big impact on foreclosure cases.

Additional reporting by Ross Colvin; writing by Andrew Quinn; editing by Leslie Adler.