I noticed a vertical crack in the wall from the baseboard up to the window above it, so I pulled off the baseboard to investigate. I saw that the drywall under the baseboard had cracked and crumbled away in a few spots. I pulled off a chunk of the drywall (about the size of 2 or 3 fingers), and much to my surprise a handful of dirt/soil/earth came out! I then used a screwdriver to jab the drywall (just below the height of the baseboard) which easily crumbled and came loose. If it didn't break up easily I skipped ahead to try the next spot. I did this along the length of the wall and about ¾ of it had this problem.
I then stuck an inspection camera inside the opening and mostly saw insulation. Where I was able have an unobstructed view, I could see lots of cracking. I could also see outside light coming into the wall's interior when the room was darkened.
Next, I went outside to find the place where the light was entering the wall. I started by digging some of the ground away from the foundation down to about a foot. The concrete of the foundation appeared to be in good condition and did not reveal any cracking or any openings leading inside the house.
To find the light's point of entry which I saw from inside, I referenced a corner of the window to measure offsets down and along the wall to the problem area inside the house. I then used these measurements to measure from the same corner of the window on the outside of the house. The specified location was a point just above the boundary between the foundation and the facade of house. This was confusing at first because no deterioration was apparent. The reason was because although the surface of the facade was intact, it had separated from the rest of the house which could only be seen by looking upwards from the ground. The tape measure would not be able to penetrate the gap between the facade and the wall were it not below the level of the ground and pointing skywards.
To verify that the point of entry on the inside of the wall actually exited the exterior wall at the indicated location, I was able to stick a tape measure into the wall from inside the house,
and see it in the gap from outside the house. This also was a way to measure the size of the gap (about ¾").
What I would like to know is: what could be the cause; how serious is this; what should be done to prevent this from continuing; and how to repair the damage?
The only answers I can hazard are:(null); not serious at all; just ignore the problem, it will go away by itself; for the interior, use "great stuff" expanding foam in the interior of the wall, trim to be flush with the inside surface of the drywall, and then use Plaster of Paris (which I have never used and have no idea of its working viscosity) to replace the missing drywall (or cut off the jagged edge of the drywall and cut a strip of drywall to fit into the empty space), and for the exterior of the house I would seal off the gap by troweling some mortar into the first inch or two of the gap. (These kind of "solutions" are the reason I'm asking for advice!)
EDIT: (I've just accepted the answer, but I thought I'd update with some more info.)
I think what I have learned is that the foundation of a house should always be above the level of the ground surrounding it. What has happened in this case is that this house had a 2-car garage which was remodeled into a master bedroom. Then the front wall of the garage-turned-into-bedroom had a giant flower bed built onto it (in the way you might see a flower box hanging outside of a window). The left side of the above photo show the same area as seen in photo #4, only from a slightly different angle and further back and after I filled in the hole. Photo #5 shows the foundation after I dug away some dirt, as well as the bottom of the (fake) stone facade. This is where the problem is because the foundation, facade and ground all meet at this level. This is why the dirt/soil/earth came out from behind the baseboard, because it was always right outside. The next photo gives photos# 7 & 10 some perspective from the XYZ axes I drew. (The ground is parallel to the XY plane.) Also notice what is between the red lines. This is a 2x4 which lies flat on the foundation so you can see just where the foundation is/ends. Here is that same 2x4 as seen from inside the house: When I look at photo# 3, I think it wasn't much help because, like, What is all that stuff? This one is hopefully better. The red line is calling attention to the edge of something which I think is that black tar paper stuff used as a vapor barrier to block wetness. It is still attached to the vertical stud (to the right, from our perspective). You can tell, because the shadow cast onto it is very thin. The green arrows point to the stud from the previous photo. The black lines are meant to be parallel to each other and to the 2x4 (the ground). They represent the size of the gap (the facade separated from the house) and is equal to the blue arrow.
Luckily this house is in the dry desert climate of Nevada, so at least the damage isn't as bad as it could have been. (I installed a Panasonic "Whisper Warm" - I think that was the name, it was "whisper" something - which was kinda expensive but WELL WORTH the money because it really is quiet. Highly recommended if you can't stand how irritating a noisy bathroom exhaust fan can be. Anyway, when I installed this fan, and I was removing the old one, I saw that it had never been hooked up to vent outside! Not that it had broken or was disconnected, there never was any kind of vent or opening for that slinky-exhaust-tube-stuff to attach itself to! And the old exhaust fan was old. I mean o-l-d OLD! Probably original to the house so that means 40 to 50 years old. And all that time the showers taken in the bathroom just vented into the attic!) Long story still long: although there is water damage present, it's not as bad as it could be. But thanks for the help because I can now give a somewhat competent report to the owner who of course is the one making the decision.