The children service returns administrative divisions till the last level and when there are no more administrative divisions it returns the cities.
Returning all features would return tens of thousands of rows and would no longer be managable.
Yes, this is exactly what the children web service is doing. It first tries to find lower level admin divisions and if it has reached the bottom it searches for populated places. You can write your own children service without this restriction and get lakes or mountains or whatever you like.