I just figured out how to solve this problem. I have an iMac late 2009, iPhone SE2020. Keeps asking me for password in Mail.
Sign out of all web based outlook.
Mark inactive the current mailbox Hotmail
on your iPhone do the same
Add new maill box on iPhone FIRST, choosing outlook.com and normail email and password as before.
Then on iMac, add the mail account again to Mail, and THIS TIME it will be able to accept the normal password.
Reason for this issue, is that your iPhone is the master on all Apple programs not the iMac. The new account security features from Microsoft have a new layer of security, and only the phone shows that mail account "outlook.com" and on the desktop its only Exchange.
So do these in this order, no need to change password. No need to reboot even.
And you will no longder be asked for a password promt while using an iMac Mail account