May be I misunderstanding something, but where does the incoming telephone line (from telephone exchange / centeral office) connects to?

You see you have to tap DTMF from telephone line while a telephone set is connected to the line. Now referring to your schematic, if Phone1 connector is your telephone set then your telephone line must connect to TIP and RING. If that that is the case, the direction of your bridge is wrong.

Alternatively, may be you connect telephone line and telephone set to Phone1 connector and your TIP and RING terminals (after bridge) are meant only for connection to MT8870.

Here is an un-protected and un-filtered interface scheme where MT8870 has been used in single ended configuration. You can feed it from telephone line by either using a bridge or a transformer (both are separately shown in dashed rectangles, marked as #1 and #2).



In case you use a bridge, you must use Isolated RS-232. If you use transformer, the isolation is not required on RS-232.

Remember, this is un-protected. Telephone line may contain dangerous voltages/spikes under certain conditions so you must add protection. All the components must be able to withstand the stress conditions.