The house you’re buying is the collateral for their loan. If you took out a loan for 100% of the value of the house and are immediately unable to make payments, the bank then owns the house. For them to simply break even, they’d have to sell the house for more than you paid for it to cover the various costs (lawyers, agents, etc.) If the reason you’re unable to make payments is that the economy crashed and housing prices tanked as a result, the bank couldn’t hope to break even on their loan.

The down payment is basically a way to ensure that in the bank’s worst case scenario they still don’t lose money. In theory, the bigger the down payment, the lower the risk for the bank, and the better a rate you should get on the loan. Multiple banks should all be trying to be the one to give you a mortgage, and should be trying to compete by shaving their margins as tight as possible given their risk tolerance. Of course, it doesn’t always work out that way, but there’s a reason for what they’re doing and it’s not just to screw over their customers.