> Or do we just blend the risk with everyone so if you always paid your loans on time, you pay the same rate as someone who has a loan write off and is 3 months behind in loan payments?

This is how it works in Denmark for property mortgages. There is security in the house and up to 80% of the house price can be lent. It's up to the credit institution and bank to decide whether to approve you for the loan based on an expense budget provided by you, pay slips for the past 3 months and the property valuation. Bank provides the contact between you and the credit institution as well as budget vetting, the credit institution sells bonds to investors to raise the money for the mortgage. Risk is spread over the bond series and is carried by the credit institution.

We have some of the lowest mortgage rates anywhere. Current 30 year rate is 5%. This is after a huge hike in the last year after having been at 0% or even negative for at least 5 years.

So yeah, for large investments like property mortgages with considerable security drop the credit rating and spread the risk across enough people. On average it will be cheaper.