I did a closed crankcase vent system.I bought a Racor system .You go from the breather to the racor and then to the air filter. The racor has a filter inside that takes all oil out and sends just fumes to the air filter.I will be on the boat tomorrow and will get the model of racor which is a match for our engines since I talked to the people at racor.My wife loves this system as there are are no smells from the engine now

I would love to hear what Racor system you put in, Bill.  Mine makes a huge mess.  The air filter and everything adjacent is constantly soaked in oil and it drips all over the engine and into the sump, coincidentally along with all of the overflow coolant that the engine dumps there because there is no coolant recovery tank (working on rectifying that part now).  Some of the decisions made really make you scratch your head.

Dave
The unit I used is Racor CCV1500-04.I mounted the unit on the shelf in the aft state room.ran the hose from engine to racor then back to the air filter. there is a hose that comes off the ccv which will cary any oil to a quart oil container under the front of the engine The oil does not come out until the engine is shut downand after 2 years there is very little oil in there.Racor shows to route this hose back to the oil pan.Make sure you leave enough room above the ccv to get the filter out they advise to change at 500 hours.I paid about 265$for the unit it has cut down on oil mess and smells

Dave

Please post some photos of your set up if possible.

I should be able to this weekend

Bill,
 I too am looking forward to seeing photos of that installation and especially the positioning of that filter.
Thnaks,
 Bill Dolan
Hull # 1041

Hm.  Well Dave, I'm no diesel expert (just bought our '91 3 years ago and only had a Saildrive and outboard previously), but I have the same engine as you do.   I suspect that the source of that oil in your air filter is NOT from the breather tube attached to the header, but from splash-back from inside the intake manifold.  I say this because on my M-35a the breather tube is not connected back to the air filter, it points straight down into the space below the engine.  I have never had any oil come out of that tube, rather it appears to be an air intake (which explains why the previous owner of your vessel attached it to the intake spout).   Also my foam air filter in the air intake drum is always oil-soaked, not because it is sucking oily air from the compartment (clean, dry air being sucked in back there), but rather because there is some spray making its way out of the engine (I am assuming unless someone can explain the source in some other way?). 

Bill, do you find that your Racor filter is regularly oil-soaked or relatively dry?  And what about your foam air filter?

I have not taken the filter out of the racor but will put in a new one this winter.My breather tube when straight down before and I would get oil into the alternator it was very little but any is too much.Most newer engines use a ccv system and it did cut down on smells

It would be abnormal to have reverse air flow (positive pressure) in your intake manifold enough to cause oil to pool into your air cleaner.  Valve timing would be suspect here as positive pressure is most likely to happen if an intake valve opens during an exhaust stroke.

Normal to have oil in the crankcase ventilation hose and is the most common source of oil in air cleaner if found there.  In a crankcase, there is net positive pressure due to leakage of exhaust past the rings mixing a bit with connecting rod bearing oil throw.  In a car, this mixture is returned directly to the intake manifold (via PCV valve), but in a diesel this is not desirable.  Most often, this is directed back to the vicinity of the air cleaner in order to provide an "air gap" (to prevent engine runaway).

The oil that does make it out this hose has exhaust byproducts that are a bit more corrosive than just straight lubrication oil, so the best practice is to not allow this to pool on any surface not designed to resist those byproducts.

You asked about my foam air filter I changed my filter out for a K&N filter.Is easy to clean and does a better job

On my first diesel boat, I had the engine breather hose dangling in the engine compartment and thought nothing of it.  I noticed a bit of smell in the cabin, but just wrote it off to "new engine smell".  One night I was on the boat with with engine running and I just had a flashlight for light inside the cabin.  I was amazed at how much smoke was in the cabin that could not be seen otherwise.  Upon investigation, I traced this down to the crankcase vent hose.  Even if your hose does not drip, what is coming out of that hose is exhaust blow-by and oil mist.  Your air intake is sucking some of this in and a filter in the way will usually wring out the oil mist.  It may only be a drop or two every year, but it's there.  If you don't route this vent line properly (either outside the boat or air-gapped to the intake), then crankcase stuff is going places you don't want it to go.

Insofar as your alternator, hard to tell what has happened.  Not withstanding the corrosive nature of salt water, water is somewhat tolerable because it will evaporate when heated.  Engine oil might have soaked the brushes and if I was a betting man.....Might be just time to bite the bullet and install a new alternator.  I mean, 25 years is a long time for an alternator (if original) and perhaps just time to say "thanks".

I ran the hose back to Racor ccv on the shelf in the aft state room then to the K&N air filter. the other hose out of the racor goes to a blue qt container at the front of the engine