I agree that fictionalization mediates many, possibly essentially all, human relationships. Just listen to people's break-up stories to see examples! Or compare parents and children talking about long-ago events.
I'm pretty sure it's inherent in the hardware; the same hardware that gives us enough empathy to survive in a tribe (accepting that research for the sake of discussion, as has already been mentioned). Empathizing with people is, I strongly suspect, tightly bound up with fictionalizing them.
Which is not to say that it isn't often a problem, and at extreme levels can be quite pathological. I've caught the edges now and then myself, and watched friends become nano- and even micro-celebrities. (If David Bowie is a full-fledged celebrity, does that make Obama about a deci-celebrity? And by "micro" maybe we get to Neil Gaiman?) Must be really weird for that to intrude into your life reasonably frequently.
And I agree with mrissa that there's some kind of line there, where the real human contact gets lost in excessive fictionalization.