You got it mixed up there, initially they wanted to have Morrowind as the playable area, but it was too ambitious of a project so they decided to only work on Vvardenfell and make sure that the playable area had enough depth and content, rather than the huge area mostly void of any content that it would have otherwise been. The name might be confusing to those who haven't played it, but it was definitely Vvardenfell in ES III, not mainland Morrowind.
As for rebuilding of towns/cities post-destruction, all of my yes. I hate it when in videogames things stay destroyed/in ruins permanently after they've been destroyed, even years later. The smouldering building in Whiterun, the ruined Helgen/Kvatch, it just completely breaks immersion when you pass by it and think about it (perhaps in the case of one/two buildings it's not that bad, but it's hard to ignore an entire settlement that you pass by several times still in ruins 5 years after whatever event caused the destruction).