Exactly the same neural apparatus are used for dreams as for waking life. Why should dreams automatically be assumed to be self-delusion; are our waking thoughts self-delusion? Is our brain not capable of coherent data streams when we are not consciously active; I think so. I think the mode of operation and internal language(s) may be different in that state though.
Yes, it is interesting and I think it's necessary from a survival perspective that the sleeping brain keeps tabs on the external environment via the senses; it is, after all, sharing the same gear to make the dreams and keep tabs. It's not surprising, imo, that sensory data has an effect on dream output.
It seems to me that the brain makes caricatures of people or events as a means of emphasis, the degree of grotesqueness or exaggeration depending on how intensely one is disturbed by particular memories, anxieties, fears or people. The net result I think is to attempt to correct or level out emotional disequilibrium. If you are too happy in waking life the dreams could well be bad as well as vice versa when you are unhappy..