Lemme see if I understand this with a crude example. We take two families, one with great credit, one without, who apply for a loan. The first family is in a group with say 1% default rate, the other with 30% default rate. In a "normal market", the former might get offered say 5% and the latter 6%.
Now, the former would pay say 5.35% and the latter 5.55%, sort of leveling the playing field. This would also mean more folks in the latter could get the loan, and fewer in the former. This would lead to more defaults. I guess if they pass them off to Fannie and Fredowski, the gubmint will cover the losses.