Why do you think this is a bug?  This is pure awesome!

What would make it better would be if the city started producing Wildlands units of whatever flavor is relevant.  

Also - the Wildlands fortress has a nice growth factor of +6, guess everyone's really impressed by Morian's power and flocking in to live there, heh.

I believe this is more or less as designed. At one point the Wildlands actually tried to actively expand their borders, I think this has been toned down or eliminated now, but it's not that surprising to me that a Wildlands can take a city.

Don't think this is intended. But I would like to present the following... see the AI does get attacked by Wildlands and their cities do get attacked by the monsters...

The Marsh wildlands are about the only wildlands that has a big boss that you are allowed to settle BEFORE killing the big boss.  All you need to do is raid all the loot squares to clear this wildland.