The generator code is very simple: every poem consists of several lines randomly selected from a text file containing a few hundred lines. There are several different source files, and I add new ones from time to time. Additionally, there's some randomization of other parameters (number of lines, line spacing, etc.), but other than that, there's not much to it. No effort is made to try and preserve valid syntax or constrain line selection in any way. It's essentially a brute force approach, and once in a while it works surprisingly well.
Mostly for fun. I think it's a nifty way to waste five minutes here and there. I suppose if you were willing to sit around and hit refresh several thousand times, you could probably also use it to 'write' a book of passable poems.
Not at the moment. But if you've generated a poem you particularly like, please send it my way (tal at microfiction dot org). If I get enough good ones, I'll put them up on a separate page.
Not currently, though I may add this capability at some point.
I like the default best. In terms of coherency, setting source to Bukowski works best. I also like source: neuropsych with dirty mode turned on (note: currently disabled). Your mileage may vary.