People are now aware that the foreclosure mess has led to lower sales on foreclosed homes. But what they don’t know is that it has also affected another group of people considered more influential in aiding the housing and economic recovery. The very people helping wipe out the inventory on foreclosed homes has decided to stay in the sidelines until the issue on foreclosure fraud dies down.

Investors help keep supply at a low by rehabilitating foreclosed properties before selling or renting them out. With the dawn of foreclosure fraud and rob-signing, though, investors are filled with fear. And they have chosen to freeze any foreclosure buying and selling activities as well.

“We’re like a plane flying around in a holding pattern, waiting to land. Nothing is going on, and why? Fear has taken hold in the marketplace,” shares Southern California investor Tony Alvarez.

The whole housing market was turned upside down when news of possible fraud and robo-signing descended on foreclosure proceedings. This has led major banks and mortgage lenders to suspend any foreclosure activities. Though Bank of America and GMAC Mortgage have recently lifted their foreclosure freezes, the joint investigation launched by state attorneys general in 50 states is still putting foreclosure activities at a standstill.

With investors deciding to step back on buying and selling foreclosed homes, housing market growth also remains stagnant. Amherst Securities managing director Laurie Goodman, emphasizing on the role these investors play in pushing the economy up, wrote that the demand-side will be making the right decision if federal loans are extended to investors. According to the National Association of Realtors, investors have generated 21% of existing home sales in August – the number is even up to 40% in areas where risky lending and speculation were rampant in the housing boom (like Phoenix, Orlando, and Florida).

With fewer investors taking risks on foreclosed properties, fewer sales are also generated. This means the supply is elevated and home prices remain low. This chain of events leads consumers to feeling poorer, thus less willing to spend – and consumer spending accounts for two-thirds of the U.S. economy.