It took me ~3 days of searching, and searching...only to find out that someone had already posted this image for this same question back in 2008. And many others wondered the same, "why does that 3rd hose just end up open ended just above the transmission oil pan. I am glad to say that today, though I am sure everyone else is past this already...I hope to help others in my shoes. I found the page that shows the route of the two lines. Transmission line loops back under. Transfer case line ends up j-hook in the engine compartment.

Someone on this thread brought both lines up to the engine compartment. Meaning, the transmission line that loops back down and ends up just above the transmission, is now elevated above the valve covers (for reference on level). What is the main reason for keeping the transmission vent tube open under the vehicle and just above the transmission level? Can there be any harm in raising the vent tube higher, as indicated above?

 

No harm in raising it higher

 

I learned the hard way last week after my transfer case self destructed from a lack of gear oil - it had no apparent leaks on the drive - but the breather tube came off the holder melted on the exhaust and clogged - this caused the case to build pressure and blow the oil out a seal all over the chassis - no telltale drips - so when it went I was shocked - I had changed the fluid about 10k miles ago - very expensive lesson

 

My guess is that the looped line made assembly in the factory a bit easier. The modification is an improvement, since it could clog up easier because of more dirt down there. The air pressure difference due to different height is so small that it is negligible.