Which produces this:

mod-hook-text-prop (1 4), inhibit? nil
mod-hook-change-fun (1 4), inhibit? t
mod-hook-ov-prop (#<overlay from 1 to 5 in *test*> nil 1 4), inhibit? t
mod-hook-change-fun (1 1 3), inhibit? t
mod-hook-ov-prop (#<overlay from 1 to 2 in *test*> t 1 1 3), inhibit? t
mod-hook-change-fun (1 1), inhibit? t
mod-hook-change-fun (1 4 0), inhibit? t

I think we need to emphasize the difference in this case, it's rather
confusing.

> I'll answer the rest of your post later, I've got a lot on in Real Life
> at the moment.

No rush.  I've updated the patch based on your and Eli's feedback.