It has nothing to do with the engine and everything to do with Blood 2 just being an extremely mediocre game in every possible respect. It wasn't "good for the time" either... in addition to being a big step down from the first game, it also came out in the same year as Unreal and Half-Life.
In all honesty, the only decent sequel Monolith ever made was No One Lives Forever 2. Tron 2.0 and AvP2 might count as well, but Monolith didn't make the originals so it was their first crack at both franchises. But Blood 2, FEAR 2, Condemned 2, all of 'em completely lost whatever appeal the original games had.
I know it's your opinion and i agree about Blood 2,i can't tell nothing about Condemned 2 simple because i didn't played it, but can't agree on Fear 2, it was as good as the first one if not better imo, also i count AvP2 as the great sequel to the franchise, it was waaaaay better than the first one (the first one feel like they got a good idea but didn't know how to execute it well, though i loved skirmish ^_^)