All modes mean E to E, tape playback, and recordings made from the tuner or video input.
It's a comb filter on the sub luminance chroma board, and when it fails, the symptoms are unlike anything I've seen before, except perhaps a time base corrector gone crazy. No switch or control on the VCR will change the distortion, by the way. Remove the top cover. Lift up slightly and fold top board over to access sub boards. I find it easiest to set the VCR on end and prop up the top board for better access.