On emissions:
Does the vehicle have a check engine light on? If so, then you're right that it won't pass emission. If the SES/CEL light is not on, then keep on trucking!
With the cat allegedly reverse-inhaled, you should have either code P0420 or P0430.
And yes, if the material gets into the engine, it could damage your valve seals and piston rings and result in excessuve oil usage. [
Did I miss where you addressed the question of whether the PCV valves have ever been replaced?]
And if the engine consumes excessive oil that then collects at the cat, subsequent engine cycles could make it overheat and disintegrate. You have a chicken-egg situation here.
Usually the materials are blown away from the engine as alluded to above, but I have lived just long enough to know anything is possible.
These are things a compression test should help you determine... With a visual look into the catalytic converters before you spend money on a repair that might not be necessary.
On the engine replacement:
First, verify what year and model that junkyard engine is coming from.
Yes, $200 is a very good price but if it is the wrong engine, even a free engine is too expensive.
On labor, just call around. You might expect to pay around $1,300.
If/when you replace the engine, please remember to address these 2:
- Power valve screws
- Rear main seal