There is a homebrew scene, it's called XNA. No need for modding.
Kai and XConnect wont work for the 360. Well, for most games. Most games check for latency when using system link.
Your account doesn't get banned, your box does.
I was actually really excited about XNA before I looked into it.
In order to actually run the code on the 360 you not only have to spend the $100 yearly subscription, you also cannot distribute your homebrew stuff (and have it work) to anyone else except others who ahve paid that subscription. On top of that, you cannot use XNA for anything commercial.
Until they get to a point where I can make true homebrew games and at least distribute to people who want it (that have not subscribed to XNA, namely friends and family), it's not worth the effort. Just about everyone there is either working to get their foot in the door in the games industry or they have a lot of faith that XNA will be opened up in the future. The XNA guys "plan" on that, but they are making no promises.
Additionally, it's only C#, not C/C++ like the real dev kits allow, and it's only a subset of the real dev kit's APIs.
I was disappointed, can you tell? =) Anyhow, sorry, almost off topic, but I thought I'd reply for anyone interested.