About your water problem with your basement.
I used to live in Ct. what we did was there is a specail kind of paint that is applied to the wals that helps to stop the leaks. It did for us, we had some pretty bad leaks in our basement, got the wall all painted and never did have any more leaks after that. I don't remember what the product was called, but I am sure at any hardware store, they would know. Hope this helps.
Yes, wash your material in some vinegar, that will help to remove the smell. I am guesssing some of the fabric will ravel others might not.