Is it possible that, as the legislative history suggests, they (Democratic congress and Republican president) thought it was a bad idea for the tax code to encourage spending through credit cards, but a better idea to encourage home ownership?
In light of the circumstances, I think it's time to repeal the home mortgage interest deduction. It won't happen since it's become a sacred cow, but I think the unintended consequences of having it outweigh the benefits.
I think a lot of things can be attributed to ignorance over malice. You can sift through and select facts to paint any picture, but I'm not sure it's always the correct picture. For example, President Clinton exempted credit default swaps from regulation. Was that because he wanted to keep money flowing through the financial companies to keep the phony economy running, or did he just think they were innocent insurance policies? Did he encourage quasi-governental entities to participate in those same loan transactions you described to artificially inflate the economy, or to get low income people into houses (George Bush also continued that policy)? I'm guessing it's the latter on both, but you could easily paint the picture that it was the former.
Maybe if this forum were around back then, people would've called out the elimination of the credit card interest deduction or the exemption of CDSs from regulation. Then again, maybe those actions were the result of something less malicious, but had consequences people didn't consider.