Steam version of Morrowind can be modded, you do have to turn off the overlay but that can be set for morrowind only. No need to turn off the overlay every time you want to play.

One minor thing that can catch the unwary on the Steam version is that the ESM dates are new so they have to be changed to a 2002 date for mods. The MCP does this for you.

I've been using the Steam version since 2010 with no problems. Along with MCP and Papill6n's CS patch, of course.