Wow, I never heard this story!But I think I will never know if the real ninjas had all those powers they show there. The only story I've heard is, during WWII there was something like half a dozen American platoons in an island, and they sent one ninja there. In the morning, nobody was found alive. How did he do it wasn't mentioned, though. Again, something I've heard, not a fact.
Secondly, yes, we all agree that sennin isn't an official rank. If you'll look back you'll notice it just seems to be a way to designate the fact that Tsu, Jir, and Oro are much stronger than the average jounin like Raido or Genma, without actually giving them a real rank.