Everything has changed for 8.6; the MAME games now use the MAME data for most fields. All of the MAME games will be listed under Arcade, or whatever platform you choose when you import.
Yes, if you delete your arcade games (the playlists don't matter), you will lose your game ratings and favorites. It should work just fine to keep your MAME games and run the wizard to update them, but it's not the cleanest solution. One option would be to create manual playlists that contain your games at different ratings and/or favorites, and then you can re-rate them and re-favorite them with the playlists after recreating all your games with the wizard.