I wonder why survival of the fittest has to always hurt the little guy. Buyers seeking out unstable lenders seems like a good way to encourage more stable lenders.

When businesses abuse incentives and tip systemic risk into systemic crash, well, that's just the way the world works. When individual borrowers may have a transient opportunity to play games, suddenly folks are hot and bothered about moral hazard.

I'd also note you could flip that argument on its head - more people seeking out unstable lenders would help capitalize them.

Why's that a perverse incentive? As long as they're not getting bailed out on the taxpayer's dime, let them go broke and let the debt be sold at a discount (and thus more likely to be forgiven).

which may help them become less unstable.

That sounds awesome.

What's wrong with that?