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So although his origin as the bad guy of the game is shrouded in mystery, and may even have been false, it TURNED real over time.
There is a mod or two that allow you to join the sixth house if I recall, although quality of the quests/story varies (check Nexus Mods online).
There is nothing really wrong with driving out all Outlanders. Half of Tamriel is basically being colonized by Humans, who are not even native to Tamriel and the Redguards themselves have no outlanders because they murdered all of them.
Hot take. The elves aren't native either. Hell, they might not even be from the same planet.
Also, from Dagoth Ur's Plans (paraphrased):
1. Establish a theocracy with him in charge, and lead his followers to commit genocide.
2. Expose the Tribunal as frauds.
3. Commit genocide of "inferior and mongrel races" from Morrowind.
4. Drive the Empire from Morrowind.
5. Recover ancient territories "stolen" by Skyrim and Argonia (Eastmarch, The Rift, Solstheim, various islands, all of Argonia).
6. Extend theocracy across Tamriel via subversion and conquest.
Note: Dagoth Ur "perfects" people via Corprus, destroying their souls, minds and bodies, and causing them to live in absolute agony for all time.
But the TL;DR of it all is that Dagoth Ur is only a good guy in his own mind.
Also: Points 2, 4 and 5 are fair.
There' also the fact that Dagoth's definition of "outsider" includes Dunmer who were born outside of Morrowind. You have be both a Dunmer and born in Morrowind for him to like you. If either of those requirements isn't filled, he hates you, unconditionally. That's also part of the reason he's a villain.