I pulled this off of a Movie Maker Forum:
Step 1:
Create a folder called C:\Program Files\Movie Maker\Shared\AddOnTFX (if it doesn't already exist).
Step 2:
Open up Notepad (Start > All Programs > Accessories > Notepad) and copy/paste the following code. Save this in C:\Program Files\Movie Maker\Shared\AddOnTFX as letterboxmask.xml. The .xml extension is important.
Step 3:
Restart Windows Movie Maker.
Step 4:
Now when you want to use the letterbox masks, you do it as a 'title'. Go to Tools > Titles and Credits. Choose to place the title on the selected clip. Click on 'change animation type'. Scroll down to the Two-line titles and find Letterbox mask. Pick that.
Step 5:
You should see the title appear on the 'Title Overlay' track. If you can't see it, scroll down below your video and audio tracks. The rectangle will probably need to be stretched so it covers the length of your video, for as long as you want the letterbox mask to appear.
This should give you the ability to do what you want with the black bars. It won't actually change the aspect ratio, but it will cut off the top and bottom of the image to give it the look of 16:9.
As for the quality of the video, you'll just have to find better sources. If the quality of a video is poor when you begin, you won't be able to clean it up very well. You can't clear up what isn't there.