Oh yeah. You download mods and then paste them onto your own game. This makes it so, that when you have hundreds of mods, like I do, they create the land you play in completely anew. There are mods that create new weapons, spells and clothes for the player character to use, there are villages and towns and buildings. Some mods (Like Nehrim and Middle Earth Roleplay Project, MERP) are total conversions and change the game completely, remove the vanilla and make everything new, from small weapons to giant cities.
When people paste my town into their own game, all the characters and buildings appear where I have programmed them to in the game world and it updates the game in that way, while vanilla is still there under it all. Some of the events in my town also touch upon vanilla cities and areas. for an example, I have a band of adventurers who make long trips all around the game world and so on.
Morrowind was the best Elder Scrolls ever and did (still does!) indeed have a very lively and vibrant modding community. I made my first computer game mod ever for Morrowind back in 2005. It was called the "Alcoholics Guild" and had three drunks living in a house in the woods. Nothing more, nothing less

My dream is still to make a grander city for Oblivion, complete with castle, shops, guards, houses, inhabitants and a Count and Countess and the whole thing, but I don't think I will ever have the time for that, since I have a lot of other modding projects going and creating the small villages I've done, can take weeks.
I am looking forward to your reports on how it goes with the Victory Condition update! I'll add it to the game downloads as soon as you're done.