The main reason for the mortgage interest deduction is that for corporations various expenses (like interest on debt) are in fact deductible from income for tax purposes, because we tax profits, not revenue.

So if there were no mortgage interest deduction for individuals that would simply be incentive for people to form a corporation they are sole shareholders for, for the specific purpose of buying the home. This would be especially true for people who are contracting or otherwise self-employed anyway and hence can have totally legitimate income for this corporation...

Now having the mortgage interest deduction but no imputed rent income due to the owner-occupancy, that part is arguably weird.