My objection to the idea is really contingent on what YC is trying to do:
1. Get groups without an idea or product to cultivate and implement their own ideas. I think this is their primary goal, but to be honest, I have absolutely no clue whether it will work. I would wager, however, that this idea would work, especially with a good group that can deal with the pressure well.
2. Match these kickass development groups with another YC pitched idea. This is less clear how it would work, because it turns YC into a consulting/temp agency. I'm also not sure what the groups would be working for. Would it be for pay through YC, or for equity in the new startup? This, I think, is the worry for a lot of people, because it would result(like freshhawk mentioned) control being shifted away from the founders.