I understand what you're saying. In this hypothetical scenario, a lot of the playable characters would need to be cut out entirely, and focus would need to be shifted back to characters that would play like the standard Mario Bros (in this case, Steamboat Mickey and Minnie) . Enemies would indeed have to be altered as well, notably any goombas, koopas, boos, bob-ombs and anything else that's directly affiliated with Nintendo. However, they can still remain the same so far as they can still be "angry mushrooms" and "turtles". They just need their notable features changed enough as to where they are no longer "goombas" and "koopas". This can be as simple as giving the goombas a different face with different colored shoes, the koopas could have their shells turned into metallic armor, and the boos could be turned into any average cartoon ghost.
In terms of environments, World 1 could just be renamed to "Mushroom Land", and be modified just slightly so that it's not recognisable as coming directly from Nintendo. They certainly don't own the idea of a kingdom with giant mushrooms, right?. Just as they don't own the idea of a colorful desert, iceworld, etc. There is more flexibility here than you realise. Not much would have to be changed to avoid legal issues. Some of the other worlds may need more or less tinkering, to be sure.
Hunting for replacement music could be challenging, but I think it can be done given some time. I could even look for some, if such a task was undertaken. For sprites, I think commissioning a sprite artist for custom assets would be necessary for sure, and that is something else I may be willing to do also. To my recollection, there aren't many useable sprites for the Steamboat characters which is fair enough. I know you're probably thinking "what's the point?", but I feel there is an opportunity to make MKF legally distinct and allow for the team to monetise what they've made, whether by accepting patreon donations or even making this an original game that can be sold on a platform like Steam or Itch.io. Or even just to continue offering the game without fear of any kind. At this point, you're only benefiting a company that could strike you down at any moment. As enthusiastic as we are about the Nintendo brand and it's characters, they've only proven time and again that they will not tolerate even the slightest bit of fan-made media.