It works again. I got spare G17 parts from ehobby and was able to replace whats broken.
I disassembled the hammer group and found that the firing pin (valve knocker) was broken and not moving properly. So, I just replaced it. I attached a picture of the broken firing pin and the new one.
Also, I learned a bit more about the blowback housing. I applied superlube on areas that make metal on metal contact. The only time the slide get stuck is when I lightly pull back the slide. Anything above a light pull on the slide, it will go fully forward. If you lock back the slide and hit the slide release it will return fully forward.
I also found that this blowback housing does not accept a stock G17 nozzle. Nor will the blowback housing would fit in a HK3P G17 slide.