(First of all, I'm sure others who've used the same library will possibly be able to help more in this regard.)
OK. 128KB is all Flash and is all available for your app -- so, you still have plenty of room left. (What hides behind registers, for example, is accessible as paged memory.)
PPAGE3 simply happens to be the same as the highest 16K of the directly addressable 64K (non-paged), and because it has to hold your apps vectors (etc) it's best not to be used for paged code. (You could if you wanted -- at least from assembly language.) You ISRs have to go to non-paged, although you could CALL functions in paged memory from within them.
The processor's MMU will not do anything to manage your app -- it's 'your' job to organize your app into pages.
However, your C compiler might. But whether it's smart enough to split large libraries in multiple pages correctly I don't know. I suspect it won't -- at least not automatically. The reason is that CALLed (paged) functions may depend on local (BSR/JSR called) subroutines. Reshuffling paged functions, if not done correctly, will break those dependencies.
But, anyway, somebody who knows CW's 'skills' will be able to answer this better.