Yes it is a crime. In serious cases a person could find themselves behind bars for several years.
There's such a thing as criminal copyright infringement, but it's big-ticket stuff like making and selling bootleg DVDs, not simple things like imitating stuff from another game in a free mod, or downloading a few songs. "Normal" copyright infringement is a civil matter, as Robynah says -- you get sued by the rights holder for infringement, not arrested and prosecuted by the government.
(Admittedly, this can vary from country to country -- the above is true in the US and I'm fairly sure it's true in most or all other countries frequented by people in this forum.)
It's considered a form of theft.
One can make the case that infringing someone's copyright is akin to theft of potential revenue from them, but legally they're two completely different things.
Anyway, as long as you're doing your own work and not actually copying meshes/textures/whatever from another game, you're probably OK. The owner of the other game
could make a case against you since your art is "derived from" theirs, but it's unlikely, and if they did, it'd probably be just a cease&desist to make you stop distributing your mod.
Edit: However, note this bit from the forum rules:
Recently there have been a number of posts concerning Morrowind Mods and people using assets from other games, in whole or in part.
We do not and will not get involved in the policing of the Morrowind Mod community. However, in no way, shape, or form can we allow people to talk about taking copyrighted and proprietary materials from other games and using them for mods for Morrowind.
Any threads discussing using models or assets from other games in Morrowind Mods are going to be locked, no questions asked. As a software developer and publisher, we don't have the luxury of looking the other way on this. Sorry.
We certainly don't want anyone using the work we've done on Morrowind in mods for other games, so we have our part when it comes to other games. Please stop using assets from other products for Morrowind mods, and please do not use any assets from Morrowind for projects in other games.
Presumably this applies to Oblivion as well. It's not clear whether it applies to assets that you create yourself, but that just
look like things from other games. Maybe a mod can weigh in on this?