I'm fine with the free market determining the terms for loans if the lender eats any losses rather than selling the loans to Freddie/Fannie or coming to the taxpayer for a bailout.
It's because we have not yet thoroughly purged the idea of "too big to fail" from our culture that we have the government setting these requirements.
Which is precisely why the Chrysler Bailout in the 70s was such a bad move, for it set up the precedent that government was responsible for stopping companies from failing...I don't care if Chrysler paid back the money with interest early, it set a horrible precedent.