What this actually sounds like is the budget, most notably the art budget, running dry.
The physics engines themselves are open source. The implementation of them is not. Also, the animations are not created by a physics engine. A programmer/artist team actually needs to take the input from the physics engine and translate that into movements in the polygons, which isn't a completely automated, algorithm-driven process. That's not even taking into account the fact that they have different moving parts, such that, if they weren't thinking ahead when they were coding, it's possible that Peach couldn't even be a subclass of the Character object, but rather would need to be her own object entirely. This creates a trickle-down effect that makes for a whole lot of rework in a whole lot of code. That much rework can annihilate project deadlines and budgets.
The reason why I think it's a budget issue and not a we-thought-about-it-and-decided-it-was-too-much-work issue is that you have two Toads. If you planned for it, you could have had three characters from the start or added something like a Wario.