Does any of this matter? Higher default risk means the rate of defaults is higher, so the costs of foreclosure and repossession will be higher. If the market is competitive, they should be making the same amount of money on average as low risk. Low risk by definition is going to have lower repossession costs.

This changes when banks exploit mispricing or miscalculation of risk by other lenders, to undercut them or to buy low risk debt at high risk prices.