Many things can cause psychosis, so it's difficult to draw cause and effect out of the data.
I've experienced severe psychosis. For me, it was a merging of reality and imagination. I always knew what was real, but my brain couldn't filter and ignore the unreal. I would act as if imagination was reality though I knew it wasn't.
Several people I've talked to have said similar things.
I think of dreams as the result of rebooting the brain mid-defrag. It's chaotic in some way. My experiences with psychosis was far too structured and self-consistent to be a dream.
My theory is there is an active component to psychosis that doesn't fit in with REM sleep as a cause.