If something is blown out of proportion, that means someone is making it seem worse and a bigger problem than it really is. In reality, as you know, the size of the difficulty matches the general situation — that match is the “proportion”. If someone makes something seem worse than it really is, that does not match anymore: it is out of proportion.
For example, a bride finds out that she can’t get the color of decorations she wants for her wedding reception, and she wails that her wedding is “completely ruined”. She is blowing the problem out of proportion, because it’s a small problem that doesn’t actually ruin the wedding.