Tohatsu M8B Reverse Problems

After spinning the prop yesterday and thinking the 20 year old Tohatsu M8B was dead (didn't realize it was a spun prop, thought she went and threw some gears) I decided it might be time to fix the reverse, that hasn't worked in 2 years, and was hoping some of you might be able to help.

A few years ago some water got into the lower unit, froze, and crack the prop shaft housing. Since then the reverse on the outboard hasn't worked. If you trying to shift it into reverse, it just sounds like gears are grinding. It also is sometimes hard to find neutral when starting it, or will start in forward gear. Forward is fine.

Today I was taking a look at it with the engine cover off. I notice that the shifting the gears, it the shift lever under the carb was not engaging in the reverse (https://i.imgur.com/bMjFIT4.png - the parts circled). I could make it engage by holding the lever in reverse and turning the prop, then it would actually engage all three gears with no problem. It only lasted for a little bit, because I walked away for a few minutes and when I came back neutral and forward were the only gears that it would shift into. I also have no clue if what I did would actually work with the grinding problem, as I wasn't able to run the motor.

Does anyone have any clue on how to fix this, it would be really nice to have reverse again?