I don't have 2-factor security enabled on my account, it's an old free hotmail address that I usually read via web browser at outlook.live.com. I used my actual hotmail password for the Android mail app, same as before.
On my Android 9 phone (a Moto G6) I've been using the pre-installed Gmail app to read email, contacts & calendar. It worked fine until this morning, when I got the same warning to update my Exchange account, followed by the error message screenshot posted
above. Maybe an overnight app update broke something.
Removing my account (and re-adding it back) just removed all my contact phone #'s and blanked my phone calendar. Trying to add my hotmail account back as a Pop3 or Imap semi-works but only for email --the contacts & calendar won't sync.
If adding my hotmail account as an Exchange account, it complains "go back & choose Outlook, Hotmail & Live", but doing that is the same as the Pop3/Imap setup (no contacts or calendar). If I ignore & setup as Exchange, it says it OK'd the account setup,
but nothing works, sync fails for email, contacts & calendar.