I personally like the Silmarillion the way it is now, but it wouldn't hurt to imagine it in novel length.
The individual stories would be quite a read, of course, but there is the matter that they're all interwoven with each other, so in order for it all to make sense, Tolkien would still have to provide a lot of historical background (such as the whole affair in Valinor and all that). It's rather hard to make them into individual stories, since each one require another to explain it, but it might just work. When we all first read the Sil., I doubt any of us really understood everything. There must've been a lot of flipping for the appendix and the family trees and everything, but despite all this, we still fninshed it and understood it. So, a lengthier version might not really present a comprehension challenge.
However, making it into a novel would mean lessening the historic taste of it. Right now we see it as a history, and I take every word in there to be significant and important. A novel might not make readers feel that way, but a novel, on the other hand, might give the readers more understanding of the characters.