In "Biggest Sucker of All Nations" in the comments Craig, aka TMFspreadsheet, mentions that he has read that the non-deductibility of interest payments on a mortgage is one of the reasons other nations have higher savings rates.
I would suggest it also distorts people's thinking about debt by giving the illusion of getting something for nothing by having debt. A tax break is a reward.
The link below is an interesting comparison of Canadian vs US mortgages
In my six degrees of leverage series I tried to show the difference in the nature of low interest debt versus high interest debt and reduced leverage consumers face in terms of trying to get ahead. I didn't really think about deduction of interest and how that would "justify" higher percent of income to debt. It doesn't justify it, but it does probably mean that US borrowers are in more trouble because borrowers have leveraged their debt with the tax deduction.
Six Degrees of Leverage Part I
Six Degrees of Leverage Part Il
Six Degrees of Leverage Part Ill
Six Degrees of Leverage Part IV
Six Degrees of Leverage PartV
Six Degrees of Leverage Part VI