TEs have better OVR as a FB, but try a power HB at FB and he'll be the best running/catching FB you've ever had on your team.
The game puts a big emphasis on blocking abilities for FBs OVR rating. TEs generally have the blocking ability, especially given the fact that all the randomly generated TE recruits are blocking and none are balanced or receiving. Granted, it's certainly important to have a FB that can block. I mean, that's 80% of the reason I like the I-Formations so much.
But if you really just want a blocking fullback, an even better option than a TE is take your smallest offensive lineman and put him in as a fullback. Then use formation subs to put a different player in for the shotgun formations and such. But if you just want a blocker, use an offensive linemen (I formation sub O-linemen into the FB spot in a couple of I-Forms that I use and never hand off to the FB).
But if you're like me and like to spread the ball around, you want a FB who can run the ball and a FB who can catch it out of the backfield. A powerback can get the tough yards up the gut in those situations you're most likely to hand it off to the FB. But more importantly, a powerback is going to generally be a little faster and a little more likely to break tackles than a TE, so he can turn a 3rd and 2 hand off up the middle to a 15 yard run or better. Moreover, he's going to have the ability to make catches out of the backfield in any shotgun formations or the pro-split formation (which I love).
As for his blocking abilities? Well, first off, he still has some blocking abilities. And secondly, by changing his position to FB in the offseason, he trains to improve his blocking. But the thing is...fullbacks aren't generally blocking D-Linemen. Maybe in passing scenarios, but realistically, a fullback blocks a D-Lineman much the same way a HB does: dive at his legs and hope to take him out to give my QB a few extra seconds.
Most of the time, particularly in the run game, your FB is blocking guys on the second level. The linebackers. His job is to free your HB to the third level where one broken tackle can mean a touchdown. A power running back generally has the strength, size, and running blocking stats to do a decent enough job making this block. And of course, if you change him to a FB as a freshman, red shirt him... by his 5th season as a red shirt senior, he'll certainly have these abilities.
I guess it really just depends on what kind of fullback you want, but I'm generally more likely to change a powerback to a FB than a TE. Perhaps that's also because I use TEs frequently...
I'll say this though... in my dynasty, I drafted a powerback who is 6'4". Way too big...I think I'm going to change him over to a TE, so we'll see how that goes...