Mental Formations are all our stories. Stories, stories, stories. Thoughts and emotions and fabrications and projections and all these things are mental formations. A lot of problems come from our mental formations. It may start with a stimulus and we put our own perception on it, which may be completely opposite to what the reality is, and then we start to form all our mental formations - our thoughts concerned with our past conditioning concerning that stimulus.
A simple example is sometimes I might remind someone of their stepmother. The sense contact, the eye contact, depending on whether they like or don't like their stepmother, may influence their whole perception of me, which will then influence how they react to me and all their thoughts and emotions concerning me. They may even take something that I say wrong because it reminds them of what their stepmother said, etc. The same could happen with Steve. Sometimes he will remind someone of their father or their stepfather.
It can be on the side of aversion. It can also be on the side of desire and liking, so people don't see clearly or hear clearly; they take things wrongly and misunderstanding can arise, all based on our mental formations and our conditioning. Something can set it off, usually a sense contact. Then there is the arising of perception, based on our conditioning. Then all our stories about that arise. We go back into the past, bringing up memories and forming ideas about ourselves and others. We go into the future, imagining, planning, etc. Oftentimes, we are not even present. We live in our created world which isn't real at all. Mental Formations does this.