A moratorium would help families on the verge of losing their homes, but Sharga and other industry experts said it would lead to a backlog of homes on the market and further depress prices.
Even with tight lending standards, the nation is on pace to sell 4 million properties by the end of the year. That's way down from the peak of the housing boom when over 6 million were sold annually, however.
"The housing market is trying to recover ... but right now these technical delays are causing additional uncertainly," said Lawrence Yun, chief economist for the National Association of Realtors. "Some potential buyers may not want to enter the market now. And that will hold back the recovery time."
In recent weeks, major lenders such as JPMorgan Chase, Ally Financial's GMAC Mortgage unit and Bank of America have conceded that paperwork supporting an unknown number of foreclosures contain errors ranging from wrong dates to forged or inconsistent signatures. In some instances, mortgage company employees signed foreclosure documents without first verifying the information in them.
In response, the banks have suspended tens of thousands of pending foreclosures. Bank of America, for example, has suspended all its foreclosures in 23 states.
"A blanket moratorium would really hold back that natural recovery in the housing market," Yun said. "We know there are distressed properties and if there are ready buyers, that is the healing process. But if that healing process is prevented from happening, it will take longer for the market to recover."
What's unclear is how long it will take for the industry to clean up the mess.
Bruce Marks, founder and CEO of the National Association of Consumer Advocates, said the latest controversy could be good for the housing market.
"There's no lending going on out there," he said. "There's really this false assumption that says if you foreclose on something, there's going to be someone there to replace that foreclosed-on homeowner. That's not happening."
Around the country, meanwhile, the freeze on foreclosures has widened.
JPMorgan Chase announced that was expanding a review of foreclosure paperwork to include some states that don't require a court approval to foreclose. Chase will examine foreclosure documents in more than a handful of states besides the 23 that require judicial approval for a foreclosure, expanding on its earlier review of 56,000 foreclosures.
JP Morgan Chase also said the bank has stopped using the electronic mortgage tracking system, which lawyers for people losing their homes have argued is unable to accurately prove ownership of mortgages. The Mortgage Electronic Registration System, or MERS, serves as a trading house for millions of mortgages but critics say the systems lacks the required paper trail to prove mortgage ownership.
PNC Financial also said Tuesday that it was reviewing its mortgage servicing procedures, which includes foreclosures. GMAC Mortgage on Tuesday said it hired legal and accounting firms to conduct independent reviews of its foreclosure procedures in each of the 50 states.
"It's a market that pretty much is in critical condition right now," Sharga said.