Output 3,4: "Yamaha Steinberg FW ASIO MOTIF - RACK XS FW" - ????? - where the heck is this :p ????

This is audio returned from the computer to the internal mixer of the Motif-Rack XS. Audio Signal coming from your computer can be input to the internal architecture of the Rack XS where you can mix it, process it with on board System Effects before routing it back to your DAW.

Say you recorded a vocal in your DAW, and you want to use the Rev-X reverb to process that vocal. You can use the Rack XS as an effect processor by isolating the audio, send it into the Rack XS, process it and record the result back to your DAW.
You can put in on a bus, send it into the Rack XS process it and send it back to the DAW for re-recording with effects.

You'll see "mLAN In" in MULTI mode
Press [EDIT]
Select "Common"
Select "mLAN In"

(The setup for VOICE mode is in Utility)

Here's it has its own INPUT channel, volume, pan, effect sends, output assignment, etc..

Just so you know in the keyboard (Motif XS) you could also "sample" any audio arriving via this input, and then place that audio in a Voice and use it in a sequence.

For Output Channel if you choose

1. LR it goes back to your DAW
2. assLR it goes out the analog jacks
3. mLAN n,n+1 it goes back to the DAW

Is this understanding correct?

If I choose mLAN for return, then I cannot apply effects right...as this must go through the mixer??
(when I choose mLAN for a return, Chorus, Reverb, and Dry are all dashed out)

That's essentially correct. The digital input (mLAN) can use the System Effects, if, and only if, you route the OUTPUT SELECT to the main L&R.
Just as with any internal signal, when you isolate it on an individual assignable output it is removed from the main system out.

The example I gave above where you are using the Rack XS as an effect processor is really the kind of thing this facilitates. The audio in your DAW can be routed through the System (Reverb, Chorus), and the Master Effect before going to the System (Main) Output.