Why is exaggeration of its own fictionality, i.e. the hyperbolic unreality, even surreality, essential to the gothic's function?

Great question!There are several reasons for this. One is simple. It aligns with period narrative structures. There are all of these testimonies in novels about how overtly, even obviously, fictional actions are real and true; to surpass that, you need to exaggerate. A second reason is the goal of the gothic. It is the dark side of a rational age, and so embraces all forms of excess. Exaggerating fictionality is one form of excess. A third is license. That is to say, if something is openly fictional, and realism is no longer the goal, then phenomena can be enjoyed for their own sake. A fourth is mood and its effect on judgment; such an approach makes it difficult to judge reality, and so to disprove or dismiss the contents of the gothic.