It's not technically their loot but my guess is that atm the type of damage influences the loot (it's a bit of a stretch and I might be completely wrong, we did get a lot of animal and druid loot w/o any of us actually playing an animal except lycan). I have the same problem transmuting mods on GK loot but Citan already explained why that happens. Some mods actually point to that, requiring decent phlogiston for a lvl 70 item mod isn't the norm.
edit-I forgot to make notes again mainly because there's not enough time to select what you distill, I'll grab an actual notepad next run, sorry.