FCFS is indeed how it works now.

As for why SE is proposing doing both types, it's that they recognize not everyone likes the lottery system - for those that can camp a housing site for hours on end, their chances of getting a home will actually go down with the lottery system. It largely benefits those that don't have the time to camp, or those that find it too painful.

But in that same liveletter they also said they're looking for community feedback on how much should be lottery vs FCFS. If you think they should all be lottery (or vice versa), that's valid feedback that they're looking for. However, unless the feedback is just about unanimous, it'll probably be some split to keep both camps happy (or erm... keep both from getting too unhappy).

...If you think the system should be redesigned from the ground up, well, I'll agree with you, but I think at this point what we got is what we got. Of all the suggestions, SE chose to implement lottery, likely because it's practical and works in place with existing systems.