Well I guess if you defaulted on the mortgage then the bank would be left with an asset (the house) worth substantially less than the amount owed.
That would be the banks fault for loaning more than the value of the house. 125% mortgages are different than lying about earnings though.
For many years people have been brainwashed into believing that they MUST get on the housing ladder, and in doing so have exposed themselves to quite ridiculous financial risks.
Although in this case it looks like they based a business on the fraud, the full details are clearly not in the story but it does look much more than lying about income in order to get a place on a spiralling property market for fear of being left behind.