MissDoh, funny you should post this ... just today I decided I was sick of the premade families (lazy, sloppy bunch that they are in Pleasantville) and decided to do the same with the same results as you.
I don't look in SimPE or anything though so I am not sure on specifics but - I created PV, a downtown, a college (Sim State) and Bluewater. I don't know how deleteAllCharacters works exactly so I went through each neighborhood and did it and then manually deleted the ones in the bin(s) including the college.
I created 4 families and used the mailbox to force create townies, got the grim reaper head, a few pop up boxes I had to answer reset, and the box never went above 0 townies created (I know it used to go through each face with a count). I tried both create townies and create downtownies options with the same results.
After all that I said oh well, bunny breeding time
and went on with my playing only to find out that townies MUST have been generated because they kept walking by my houses.
I also noticed that the businesses that used to be owned by the BW sims are greyed out and can't be bought now. I guess the deeds got deleted with their owners.
I didn't know about the spawning tree though so I may try that one. I may have to go do it all again and see what happens.