If space isn't a concern, then convert to Huffyuv or Lagarith.
Personally, I'd just archive the original MODs. Then if I needed to edit them later, I'd convert the videos at that time.
If I need to adjust the aspect ratio flags of an MPEG video without re-encoding, I use
ReStream. Unfortunately, it works only on elementary video MPEG streams (M2V, MPV), so you'll have to demux the file first. After adjusting the aspect ratio flags, you'll need to re-mux the video and audio back together and I'm not sure that you'll be able to combine MPEG2 video and AC3 audio into a MPG container easily. VOB might be easier.
Since these MOD files are non-standard MPG files containing AC3 audio (instead of MP2), they should be very similar to VOB files from a DVD. What happens if you rename the file extension to VOB?