In regards to your postulated Child #1, that one would have been likely treated as "aryan" - the SS organisation Lebensborn e.V. for example was explicitly founded to increase the number of properly "aryan" children by any means necessary. That meant providing homes for expectant unwed mothers of sufficient racial purity, in particular those who bore a child of an SS member - in fact, all members of the SS were required to pay subsidies to the Lebensborn until they fathered 4 children of sufficient racial purity, legitimate or not - but also abduction of (often non-German) children who looked "aryan" enough to be brought up as Germans and possibly future SS members. Child #1 will not necessarily end up in one of these homes, but it might, and if it does it will end up with pro-Nazi, "racially pure" German adoptive parents.

Those who ended up in the Erziehungsheime, often due to criminal behavior or even due to being taken away from their parents for political reasons were subject to a regime of terror. Disabled children and those who came from a troubled home and had behavioural problems (so-called Asoziale) were often subject to forced sterilisation, medical experimentation and even straight-up murder as part of the various "euthanasia" programmes if they weren't sent to one of the various youth KZs.

General orphans, be they #1 or #2, if they actually managed to enter the orphanage system (more on that later), were treated a little better, as decent as you'd expect orphans in the '30s and '40s to be treated (which is to say, often not very decent at all, but at least they weren't tortured and murdered). In the orphanages they still often suffered under harsh rule and almost military drill, with daily indoctrination, often also beatings and arbitrary punishment. If they behaved, however, they could be delegated into the care of a system of caretakers who would be responsible for them from that point (if not, they risked getting sent to an Erziehungsheim), at least until they were adopted or grew too old. Obviously, as people vary, these caretakers could be anything from nice old ladies to hardcore Nazis and thus it is hard to pass judgement as to how they were treated overall, even if the authorities did often attempt to make sure that the children weren't abused by '30s/'40s standards.

However, very often children that were randomly found didn't make it to the orphanages. If they were suspected to be escaped Jewish children or similar, they might end up getting murdered before ever stepping foot into one - as an extreme example there's a passage in Hitler's Furies that describes how a stay-at-home mom married to an SS officer murdered 6 assumed orphans after luring them into the forest with sweets because she thought they were Jewish escapees.

(Du kannst Rückfragen auch gerne auf Deutsch stellen, auch wenn ich nicht weiß, ob das regelkonform wäre.)

E: Saw the edit too late, sorry.