CRJ-700 Captain reported an altitude deviation occurred on approach to ATL following a loss of the localizer signal and a wake turbulence encounter.

Narrative

During an approach to Runway 9R at ATL; the localizer signal was lost causing the FMS to display errors flight director and to revert to pitch and roll mode while the autopilot was engaged. After confirming that the FO's FD and localizer was experiencing the same malfunction; I disconnected autopilot; directed the FO to re-sequence the localizer frequency and then joined the localizer final approach course before engaging the autopilot. As we had been directed to slow to 170 knots to provide additional separation from a heavy Aircraft Y ahead of us which had already resulted in a hard wake turbulence impact already while on the arrival; my focus was on ensuring we did not cross through the final approach course and also ensure the aircraft was properly configured with flaps. During the confusion with the loss of localizer signal and the flight director; the aircraft descended from 3000 feet to 2700 feet before it was corrected; the aircraft was climbed back to 3;000 feet and the approach was continued without incident.Cause: The malfunction occurred when the aircraft was in green needles and heading mode with NAV armed after ATC directed us to join the localizer. The first indication of the malfunction was a red FD (Flight Data) symbol on the PFD (Primary Flight Display); a red LOC indication in place of the green localizer frequency followed by slight roll oscillations as the FMS reverted to PTCH/ROLL mode. I checked the FO side to see if the problem was on both sides and he had the same indications that I had. Given that the aircraft was not in APPR mode; the FMS were synced and not independent as they would be in APPR mode. As the aircraft was on a 30 degree intercept and well inside the furthest on course fix; range or azimuth did not appear to be an issue. After disconnecting autopilot; joining manually and re-sequencing the frequency; we reengaged autopilot and armed approach and there was no further issue.Suggestions: Attempting to recreate the scenario in the simulator may be helpful in understanding what happened so as to better train crews in the event of a future occurrence.