Songs must be re-sequenced in MIDI format, usually by ear, but can also be converted (not the best method, but it can save some time in some cases).
As for custom songs that you usually hear in MP3 format, they're are usually composed as a MIDI, then given a sound font to make it sound better. MP3s are just previews before they start porting them.
Alternatively, MSU1 can play external MP3 files to play in-game with your game. Personally, I don't support it, but I guess that's just my speculation as a porter. In-rom music is very compressed.