Reason the first: Clavicus Vile is the prince of [censored] and corruption
That's Molag Bal. Clavicus Vile is pretty much the devil who appears when you want to make a deal. Of course, the deal will always be slated in his favor. He is nothing more than a
very opportunistic businessman
He very often makes deals with necromancers for human souls, an he enjoys having them in his realm to 'play' with (remember, he's the got of LITERAL [censored] as well.)
We've only seen this once, and it was N'Gasta. That's the only time we have seen in-game evidence, no where else. He also doesn't [censored] people, that's Molag Bal.
A sword that allowed him to collect an infinite amount of souls would ruin him, but not like stab him. He would become like an addict. Umbra would be his Crack and his dealer.
The sword was made by a witch for the purpose of collecting souls. He somehow got ahold of it, and gave it to a warrior who took its name, and from his conversation it seems the warrior did not hold up his/her end of the bargain. He doesn't depend on souls being collected to him, and probably only keeps the sword for the sole purpose of using it as an asset to make deals, which at first seems like he is ripping himself off, but that is never the case. Plus, he only has 2 known artifacts from himself, his bitter cup and his mask
Reason the second: It imbues the wielder with the power of the which who enchanted it (Doesn't do so for the player to avoid uberness.) So it gives regular people super awesome magical powers, which can become physical powers through certain means.
No. it only steals souls. has nothing to do with game balance, because there were PLENTY of more powerful weapons in MW. Umbra in MW was pretty mediocre, but with a high amount of physical damage (also like in OB).
Reason the third: Umbra enchanted with the soul of a witch who enchanted herself into the blade. She can take over the body of the user, and drive them Sheogorath by manuifesting her spirit in their body.
At this point, I find you are making way too many assumptions and have a misunderstanding of most of what you are saying. Here's what Tamrielic Lore has to say about the sword, which also happens to be the only source of this weapon outside of holding it yourself.
Umbra Sword
The Umbra Sword was enchanted by the ancient witch Naenra Waerr, and its sole purpose was the entrapment of souls. Used in conjunction with a soul gem, the Sword allows the wielder the opportunity to imprison an enemy's soul in the gem. Naenra was executed for her evil creation, but not before she was able to hide the Sword. The Umbra Sword is very choosy when it comes to owners and therefore remains hidden until a worthy one is found.
Here's what can only be assumed. The sword was made by the witch, for the purpose of collecting souls. She was executed, but hid the sword away. Like with most artifacts from Tamriel, they tend to have a mind of their own, and appear whenever they feel like it to be used by someone they deem worthy at the time. We only know of 5 wielders of Umbra: the witch Naenra Waerr, the orc Umbra (MW), the nerevarine, the bosmer Umbra (OB), and the Champion of Cyrodil.
Clavicus Vile somehow got a hold of it after the witch was killed, and probably made a deal with an unknown warrior who eventually went by the name of Umbra. Since then, it has passed through different Umbras till the CoC took it. As of where it is now, who knows. It's either with Clavicus or in the hands of the CoC.