Without vacuum the heater matrix is in circuit. By adjusting the temperature controls you get hot or cool air as required as per most 'normal cars'. I believe this is achieved by changing the proportion of air taken via the heater matrix. Even on cold air settings the heater matrix is still at engine temperature (hence the 'cooking the dashboard' comment), again as per normal cars.
Apply vacuum to the hbv(controlled via a solenoid behind the glovebox, switched by the climate control or turning both temperature dials fully anticlockwise to operate 2 microswitch's) and the water is diverted back into the engine and bypasses the matrix, which will then cool.
I think the main purpose of the hbv is to keep as much heat out of the car, particularly when the aircon is on.
All that being said, steam or whatever coming out the vacuum connection of the hbv is wrong and sounds like a breakdown waiting to happen, and as the nature of these things is to happen when least convenient it might be best to get it sorted.
I believe others on here have done away with the hbv and plumbed the matrix permanently in line.
Steve