The AI rebuilds their own armies by either staying in their own Cities or waiting by their own villages, so if a Village is looted, that AI Lord can't recruit. (Don't quote me but it has been posted though I haven't searched to see what exactly goes on, so I'm going by memory), but they also have their own 'hidden' income from those Cities/Castles/Villages, which figures in on how fast they can recruit. Also, a City/Castle that is under Siege will not recruit new soldiers, which hinders the AI. Blocking Caravan/Farmer parties from reaching a City will hinder any Lords that are based there with recruiting.
Oh, and I'd say yes, it's hardcoded for the AI to loot enemy villages during war, and I have a feeling that the lower your relation is to that Realm, the more they will make a bee-line to your own village to loot it, no matter if they have to pass through the entire Kingdom to get to it.
I'm sure there's an algorithm in there that directs a Lord (or a whole Campaign party) to either loot village after village or to immediately siege/take something.