When Wedgefish development started, in 2005, there weren't many quality lightweight HTML editors around.
HTMLArea was deeply customized and debugged for use in the platform, and much time has been spent on this.
At date, it has been optimized to be less than half the size of other HTML editors, while keeping all most important features and working reliably on major Internet browsers.
It could be improved as well, but that's not a priority.
Future version will allow configuring each website to use a different HTML editor, and other popular HTML editors will be packaged as modules to be installed and plugged into the Item Editor.
Why didn't you use Smarty?
Smarty does not enforce actual separation of programming from design. It allows inserting conditional and looping instructions into HTML code, together with lots of other constructs.
It is practically as coding PHP pages with a simplified syntax. It is true that business logic is kept in separate files, but presentation code is still contained in the templates.
Never forget there are a lot of designers (not necessarily cheap) who barely know what HTML is, and who still rely exclusively on WYSIWYG tools to perform any kind of edit, even small, to HTML pages.
In practice, Smarty logic code will probably look quite obscure and extraneous to designers, which will tend to delete or alter it in an attempt to reformat layout under their taste.
As a result, using Smarty you'll probably end up having to fix templates after each designer edit, as would happen coding with PHP alone.