Yes the mold at bare minimum won't be good and almost garunteed is bad. It will most likely encourage respiratory infections.
I have dealt with that type of mold growth on numerous occassions as I tested different substrates, ventillation, and humidity levels. The mold growth is the main reason I went with higher ventilation but much more frequent spraying.
In my sixty gallon(48x18x18 roughly) split tops I just keep one side covered and spray weekly to keep humidity up. As long as you don't have fans running this should work fine for a sphagnum moss substrate. Since running fans in the room for my suboc's I have had to increase the spraying or cover part of the remaining side as well.
Manzanita is definitely more mold resistant but I believe it will also mold unless you seal it with resin. I have no idea what resins might be safe for reptiles in a wet warm environment but suspect epoxy would be most likely bet. Do not take my word on it though, get confirmation from someone who actually knows instead of just taking an educated guess.
As far as fixing and decontaminating your branch there is a potential problem with just microwaving it. While microwaving might kill some things it is not considered disinfecting like heat is because it does not heat all things and hence is hit or miss. This is why microwaved food is considered reheated and not cooked. It is possible for vast quantities of infectious material to survive microwaving but not regular heating because a unconverted microwave signal only agitates water molecules. That is also why microwaveable pot pies have that sivery layer in the box you microwave them in. The silvery layer emits radiant heat when hit by the microwaves.
Because of this I would suggest baking the branch in the oven in addition to/instead of microwaving. This is also the method used to make those home made pet branches from manzanita or some other woods. Just be carefull if baking un treated wood that you have a drip pan under the branch to catch any sapp that seeps.
What I am looking at for mine and you may want to consider given the mold issue, assuming your not too picky about asthetics, is using a climbing unit made from pvc. You can construct it with enough branching to offer good leverage and you can roughen the exterior by hitting it with coarse sandpaper for traction.
Anyways just thought I'd relay my experience with the mold problem. Good luck and let us know how it goes.