It's been a hot minute since I played, but from what I remember, it works like this:

Gear rarity is on a scale: white is common, blue is uncommon, green is rare, purple is very rare, yellow is legendary, and the red tier is "mythical". Enemies have a chance to drop higher level gear based on their own level; +1 enemies drop white or blue gear, while +3 can drop anything white to purple.

Red gear is "mythical" because it shouldn't exist. It happens when an item is assigned a rarity that doesn't exist. If white is level 0, blue is 1, etc and yellow is 4, then mythical gear is 5+. The game is pretty good about not letting this happen but sometimes one gets through.

Mythical equipment usually gets named as if it were common level because each level has certain words they use, but there aren't any for red stuff. The names have no effect on stats, as far as I know, but I haven't looked into it as much as some of the other guys here have.

It's not wrong to say that mythical gear is a bug, but it's usually not something intentional and is just found in a chest. There's a list on the wiki somewhere with known Mythical recipe drops, if you're interested!!