Neutering may not help w/ marking, but it might help w/ him humping your 5 year old....so if it were me, I'd neuter. Many dogs (male and female) hump. My 2 boys have a "lover dog" that they have dates with
, and my female humps her donut bed (omg, so funny). I don't believe in stopping this behavior as I think it's natural, instinctive, and I think it comforts them at times...? Anyway, I don't believe in punishing for this behavior *at all*. Rather, I'd suggest you redirect them if they were humping a human or something, to their "lover dog"...my 3 have never tried to interact w/ a human in that way though, so I've never dealt with it.
As far as potty training...def read our Potty Training sticky threads here, as there are some great suggestions:
General Training Questions - YorkieTalk.com Forums - Yorkshire Terrier Community
Your thought of fencing off a small area for him is very good...I did that when mine were puppies until they were pad trained. The small area allowed for a bed, water, food, a couple toys, and a pee pad.
If you want to REALLY get this potty trained thing nailed, then you may want to consider tethering, and I think one of those sticky threads describes it...but it basically means that until potty trained, the dog is leashed to you (like your belt or something) at ALL times, so that you can read his signals and sense when he needs to go outside. That way, any mistakes are addressed on the spot and/or you know to when to take them outside.
As far as that area near the drapes, def clean it w/ an enzymatic cleaner to get rid of the smell...and, I'd place something in front of that area too - in order to block him from that spot.