1) Loot later in the game is really bad. I can frequenlty buy or make items better than I find; and rather hard fights usually result in pitiful low level loot (i.e, boreas level 5 loot; I find the key to source king chest at level 20 and it has level 8 loot; so on). Personally I think you should be able to find or obtain loot that is better than what you can craft (though enhancing found loot via crafting is a plus) or buy.
Did you have any difficulty beating enemies with the loot you had?
I definitely agree that the Source King Chest should have loot scaled to your level, though. I opened it at level 8 and appreciated the level 8 loot, but the key for the chest is muuuuch later in the game. Better yet, it would be nice if the Source King Chest had a couple of legendaries instead of the 1 legendary and junk it currently holds.