I think it was because different people made the models for the different games, including third-party game designers not working directly within Bethesda.
I seem to recall hearing this before.... but I could be wrong.
I'm sure there are other legal issues at work, too.
It's because some of the resources have been licensed from different sources for both games.
It is possible to release a mod to use Oblivion resources in Morrowind, for users who have both games:
http://planetelderscrolls.gamespy.com/View.php?view=Mods.Detail&id=7245
"A set of MS-DOS batch files to replace some of Morrowind's sound effect with sound effects from Oblivion."
That mod requires that you have both games and doesn't contain resources from either game, which is why Vality's mod was never released. If he didn't release the Oblivion resources necessary to play his mod, then it could be released.