Need help identifying the cause of a fire

This happened weeks ago. I replaced the bit that caught fire, but never having identified the cause I'm currently driving around a little unnerved. Then the thought occurred - why not just throw out to you all some things I noticed prior to the fire, and maybe someone will have an idea.. here goes...

I'm getting on the freeway, right? Temperature spikes, shoots way up into the red in an instant - I pull to the side - notice smoke coming up from the gear selector. My reaction is to instantly pour a gallon of water onto the gear selector. Already on the phone with 911 emergency, I'm a bit shaken - you can laugh here - "It's on fire! No. No it's not. Maybe - um, no, maybe it's not. Can you just wait with me on the line for like a minute, and we'll see if it catches on fire?"

heh heh. Anyway. Fast forward a bit. It turns out, the only thing that had actually burned was the insulation on the gear selector cable. I have NO idea why. See photographs. I popped the new gear selector assembly in, and now everything seems fine.

My first guess was some wire or other, up against the gear selector cable, was grounded to something and eventually melted through the insulation and set it on fire. But I can't find ANYTHING in the vicinity. Maybe it burned up and disappeared altogether? Here's where you come in. Below are lists of anomalies I noticed before/after the fire (mind you, this car was bought from a junk yard for 1,500.00) -

BEFORE THE FIRE
* New (used) transmission just installed by a guy who's never worked on a l/r.
* "BRAKE" lamp is perpetually lit, but the parking brake is not engaged.
* The parking brake cannot even BE engaged. The button on the lever is stuck, somehow, and the lever just moves up and down.
* Something, somewhere, is continually draining the battery. If the car is parked for >24 hrs, the battery dies.
* VSS seems to be malfunctioning.

AFTER THE FIRE
* Cable for the P-brake has caught fire as well. Initially thought that this was an effect, but now am leaning more toward a potential cause?
* After installing the new gear selector assy, the P-brake now appears engaged. I clip the cable (you may laugh here too). P-brake is now disengaged and I am able to drive.
* "BRAKE" lamp has not made an appearance since.
* Now, nothing is draining the battery when the car is parked for several days.
* VSS is still (guessing) bad. Have not yet replaced it.

Pictures below

Ah, the files I was trying to upload were too big. Here we go

hmm, interesting thought..

the exhaust conduit, of course, gets pretty untouchably hot, but I have no experience to gauge how hot is too hot. The obvious follow-up question - what would cause them to be too hot?

An interesting observation: on the flange that attaches the Y-pipe to the muffler, the bolts are not tightened to spec. They never have been. There's just been so much to fix on this car, it hasn't been a high priority.

Another interesting observation: the muffler itself appears to have "ballooned" slightly. If that makes sense. Perhaps, as an experiment, disconnect the muffler altogether and see if that corrects my performance issues (as opposed to the VSS)

more thoughts?

Bill, will happily check the engine earth strap now. Where is it located?