As it turns out, I discovered there's an extra } at the end of tf_letters.vmf, causing SFM to disregard the standard proxies.
https://prnt.sc/10rm2jf

The simple fix is, delete that last curly brace and save. That fixes the bracket mismatch and then the proxies work properly, and SFM doesn't throw fits.

Also, bad practice to have the materials in a differently named path than the MDL, but if the model can find its material, no harm no foul. It just makes it easier on humans to find the bugaboos like this :p
I hope you update the file, and thanks for the letters!