An RPG in a FPS engine.
No offense, there is no possible way you could scripy any encounters, materia, story, ANYTHING in Source, its not possible.
That, quite frankly, is BS. Source is a *game* engine, not an FPS engine. The FPS aspect is merely an artifact of the game code (which is available to modders).
You can implement any type of game you want in Source, or most moddable games. RTS, FPS, TPS, RPG, you name it.
There is absolutely zero reason you couldn't implement a mod for Source that featured a field module, a battle module, a worldmap module, and so on. Crazier things have been done with engines LESS flexible than Source.
From what you're describing, you seem to think that the most you can do with Source is make custom maps, when in fact Valve gives you access to the entire game (not engine) source code, allowing you to do whatever you want with the engine. Something like FF7 from a technical perspective is actually probably less effort than some of the crazy things other mod teams have done.
That said, the original proposition (remaking FF7 using the Source engine) is stupid, since it'd be shut down in no time flat. But there's nothing stopping anybody from creating a mod that is essentially the exact same thing as FF7, gameplay-wise.
I think the confusion stems from what a "mod" means for FF7 (usually just replacing media or manually tweaking the binary) compared to what it means for an engine like Source (having the entire game's (not engine) sourcecode available to play with).
In fact, I'd go so far as to say that the flexibility to do this sort of thing has probably existed as far back as Quake 2, although the further back you go the less suited the engine would have been for moving beyond the FPS genre. But modern engines such as Source and Unreal are regularly used by both modders and commercial teams for non-FPS games.
