I never owned one of these, because I was put off by the small motor mounted the wrong way. However, I would be really surprised to learn that the gear ratio was 12:1. I have examined Lionel locos based on the K-Line tooling, some of which still use this arrangement. They are geared in the 18:1 to 22:1 range, which is what I would expect for the K-Line Mikado. Maybe someone that owns an original K-Line can take the shell off and count the revs.
A lot of the stuff K-Line made was "cheap"; i.e., corners were cut to save a few bucks. With these locos, Maury Klein was trying to break into the scale steam market against established players by offering product at a $600 price point. As Ben Franklin said, "The bitterness of poor quality remains long after the sweetness of low price is forgotten." The MTH USRA Mikado is geared about the same, but comes standard with a Pittman motor mounted in the firebox, as God intended!
I agree wholeheartedly that using a stand-alone KTM-style gearbox would be the best solution. But you would pretty much have to redesign the loco, as the axles and worm wheel are "captive" in the chassis. Just thinking about Lobaugh, Max Gray, and US Hobbies stuff from the '50s and '60s makes me green with envy!
