Definitely bad for the foundation, definitely been happening for a 100 years, definitely still has plenty of mass per the structural engineer. This is actually an interior wall that is being sheared as part of a larger structural assembly to mitigate the soft story condition of the garage opening at the end of the room. Rather than pour new footings and install a significant moment frame, I opted to shear the four walls and ceiling of the garage, and will add a second rear sheared wall to demise the new bathroom that should add to the rigidity.
I'll probably pursue just a topping coat and paint. I have a dustless drywall sander already so it shouldn't be too hard to smooth the skim coat out. Thanks all. Yes, earthquake retrofitting seems pretty arbitrary when you only get to test your methods sporadically, and there's a million conditions if you get beyond the standard crawlspace situation.