Of course confabulation occurs
but it cannot explain the parapsychology dream studies.
In the Maimonides dream studies mentioned above, 'confabulation' is practically impossible. One person (the receiver) sleeps in a soundproof, electromagnetically shielded room. Electrodes monitor the receiving person's brainwaves and a technician also monitors eye movements. When person enters REM sleep (that means dreaming has begun)
The sender opens a randomly selected envelope containing a picture (one of 8 others), the sending person has no contact with the sleeper and only has communication with others via a buzzer, once getting a buzz the sender tries to transmit image to sleeper.
The sleeper is then woken, their dream audio taped and independent judges who have no clue which picture was used choose the best match from the 8 pictures.
A meta-analysis of those experiments from 1966-2004 resulted in psi being found, with odds of 22 billion to 1 with a 99.999999996% confidence level the results exclude chance. But still a weak effect, only around 9% above chance
The point I am trying to make is that if psi and consciousness is not a brain function, upon brain death, shared hallucinations will increase in accuracy, vividness and detail......and we have some sort of evolving virtual reality 
So it doesn't matter whether Virgin Mary existed or not, upon brain death strong belief (or faith) amongst believers may allow such an illusion to evolve, until they begin to realize they are creating it
It might even mean skeptics certain there is no life after death become unaware they have died and dream they are still alive on earth.
I am NOT religious. I am probably less keen on organized religion than you are but *if* psi is not a generated by the brain, *if* hallucination is not generated by the brain and the brain is an device that evolved holding our sense of (shared) reality together through the physical senses. Then something resembling religious claims could be occurring... whether materialists like it or not.