It is possible to create entire levels out of models, for example, in 3DS, but I never got the collision working correctly and the shading...
But, I've tested this in the old days, so it could work better now.

As for 3) , I went that road before, and it turned out amazing!
And, the thing about modding is true... It is present in my game , The Dreamlord.

With this editor, you never leave the game and it actually uses the gameplay mechanics, so you're literally playing while building and testing your level. I should warn you, that its a lot of work, but its totally worth it!

PS.: You can see a glimpse of it in the trailer:
The Dreamlord - Trailer