How it all began:
The very first Fed Tax was such that all interest paid ( no matter to whom or for what) was deductible. The Supreme Court in 1913, said that the federal tax law was unconstitutional.

So the Country amended the Constitution and again all interest was deductible.
The Fed tax allowed you to deduct the first $3,000.00 of your income from any taxable income. For marrieds it was $4000.00

At the time, less than 1% of the nation was earning more than that (kind of makes one wonder where BoZo got his 1% line). So only the wealthiest 1% paid any tax at all.

However as it regards interest: Almost no one paid any except farmers and businesses. People were able to purchase their homes in a cash transaction they were that affordable. So the interest deduction was not operative for the vast majority of the people
At the time the banking industry hadn’t got it’s head around the idea of saddling every one with a mortgage. It was the people who had an income generated as a result of borrowing that benefited from the interest deduction. The common folk did not borrow.
As an aside the country round the cities was pretty much vacant except for farms. People lived in the cities.
With the advent of the family car household mortgages took on a life of their own. People were able to live away from the city and commute to work. Eventually the bankers got a wonderful gimmie from the Fed around 1930: the Federal Housing Administration (FHA) was suddenly on the scene and willing to insure all those 30 year mortgages.

This was like candy land for the bankers and it was the beginning of the end for the market today. They could lend, lend, lend and the mortgages could be guaranteed by the tax payer. The FHA became the Federal National Mortgage Association ( Fannie Mae) and the insurance continued.
Prior to the Fed wading into things the local bank held the mortgage until it was paid. With th3 Fed in the game they could sell the mortgages at a profit to Fannie and go lend some more. It was pig heaven for bankers & good for would be home owners too because banks didn’t have to be so careful about their lending criteria.

Eventually interest for non income generating industry was removed from the deductions list because so many people were using credit for things that didn’t generate income. This killed any interest from mortgages as a deductible.

Meanwhile Roosevelt wanted the Social Security bill to pass and he satisfied his opponents by including a mortgage interest deduction.
SS passed and you can deduct your mortgage interest – much to the joy of the bankers - - again. ‘

The mortgage interest deduction treats interest like a business expense for tax purposes.
The difference of course is that the business generates income and until the home is sole there is no income imputer or otherwise.

Then along came the Community Reinvestment act of 1977 and the banks were being forced to loan to borrowers who were unable to shot an ability to pay the loans back.
The Democrats were trying to legislate opportunity.

People like Barny Frank and Dodd fought to prevent any reforms to the lending practices that were quickly polluting the economy.

Meanwhile the Bad Loans were being bundled up and sold off tucked away in hedge funds and securities in amounts that were too small to stand out as an issue - - - until the sheer numbers the weight of badness made every one terrified that they had some - - too much of this toxic shit and that it might do them harm.

And finally - - - - - - - “God bless us every one.” (Tiny Tim)