As far as the spirit portion becoming fully fae goes, I'd see that as a lose condition for the Cu Sith. To maintain the balance of all 3 worlds, the Cu Sith would need to work hard. They'd need to spend time out of the Hedge. Staying too long would result in them evolving into something else entirely (briarwolves perhaps?).
As far as werewolves against the True Fae go, I'd say that in Arcadia and probably in the Hedge, the wolves would be screwed. Ironside might be a different story. The reason that I think that Cu Sith made from existing wolves would be rare isn't because the Gentry would lack the ability, but rather that most wolves don't go running through the Hedge on a regular basis. A Pure pack or a Lodge that are handing over wolves to the Fae would be great justification for a larger number of Cu Sith in a given chronicle, if the Storyteller wanted them to be a running theme rather than a freak of the week or a unique NPC.