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And what happens to the old engine? Does it get refurbished somewhere slow&cheap and become a crate motor for step 2 a few months down the line? Or thrown out?
Depends, but most likely it is either parted out or sent back to be refurbished. Failing that, it will certainly be recycled. There is a shitload of aluminum in any vaguely modern engine (like, from the 1990's onwards) so even the shadiest of shadetree mechanics will have it melted down for cash before just chucking it in a landfill.
Same thing happens with transmissions. It's nearly impossible to buy a new transmission for cars that are more than a couple of years old -- they're all remanufactured by Jasper or whoever.
Yes there are companies out there that buy and refurbish engines. You give them yours as a core and they send you a 'refurbished' one.
The place I'm going through will take the old engine once it's out and refurbish it if they can or part out if the components are good. Personally I think they'll scrap it as it's over 150k miles