My guess why the character creator looks the way it does is because its an extension of the system they use to generate NPCs.
They need to generate a lot of random people with different looks depending on the place on the map they are. So instead of having randomized facial features that has a tendency to look weird, they used a system to derive facial features from a set of pre-made (normal looking) characters. That way, they know the result will look somewhat reasonable.
It's the same with the "life style" option. They can define areas in the map where people are rich/poor/criminals etc etc and have the game populate that space with people looking "appropriate" for the area. It's a smooth automatic system for doing A LOT of stuff very easily.
I'm sure Rock Star is aware of the system not really doing what people want out of it, but it was the system they had to work with (given time/money etc, I'm guessing). My wish for the future of the GTA franchise is that they get more into dynamic stuff using multiplayer as a larger component, and with that... a better character creator :)
@FLStyle: It's just a matter of time. New games are being announced all the time, with increasingly higher quality and more impressive tech.
In the end P4F games are just another way of charging for games. Instead of buying the whole game in one go, you could decide how much you'd like to spend on a P4F game. You could play it entirely for free, if you'd like. The P4F game needs to be designed to be fun for everyone, but at the same time telling the customer "Hey, look at how much fun you're having for free, think of how much awesomererer it can be if you just pay 15 bucks!".
On top of that, P4F games are made to be online for a looong time, and continuously evolve during that time. A perfect opportunity for building a strong community that follows the game and have input on it's development.