The Suffering/WMG

The Malefactors are directly from Hell itself.
Torque, with such high pyschic energy, became a perfect counduit for the minions of hell to emerge onto the physical plane. Carnate, with it's horrible history, was the breaking point for the creatures to move in on the world.
 * Where does this put him on the 10.0 scale of badness?
 * 42

The Suffering is set in another area affected by Silent Hill
Come on, it's true. You know in your heart it is. I wonder if there is a fanfic crossover with Silent Hill... Probably not. Hopefully not.
 * At the very least, there's one crossing over with Danny Phantom.

Torque is the product of Silent Hill's cult attempting to birth a god to bring their paradise to Earth.

 * Everywhere he goes after he has become full of pain and suffering(something the cult's avatar needs as seen with Alessa) after his wife and kids get murdered, Torque starts causing the Silent Hill's Otherworld to slowly seep through, the holes where they Malefactors emerge are the points of intrusion onto reality and the Otherworld would slowly grow out from their as the Malefactors make every suffer more. Torque's transformations are him manifesting his power as the God of the cult, normal people do not believe in him so they only see a berserker raging through the monsters. Until he confronts his  Torque had incomplete control of his power.

Torque is a powerful Persona user.

 * The Malefactors are servants of some force who fears that Torque will on day ruin whatever plans he has for the real world. The transformations are incomplete persona uses, where Torque cannot separate himself from his Persona.

Torque's hallucinations are "real" on the same level of existence the Malefactors exist on
Clem and Dr. Killjoy both reference the berserker furies in which Torque tears apart his foes with his bare hands, and neither see him physically turning into a monster. On the other hand, Torque can clearly do a Ground Pound in the second game when he's a monster, and that shouldn't be possible no matter how much adrenaline he's hopped up on. As a compromise, I'd argue that the Little Fears rules for damaging monsters apply to this game as well: if you think something will kill the monster, it really will, and if he thinks he's creating a shockwave and knocking a Malefactor over, then by golly, the Malefactor will fall to that nonexistent shockwave. This could also be why so many NPCs die against the Malefactors--in their hearts, they're too afraid to really believe bullets can kill these twisted freaks, so said freaks are barely affected by or not affected at all by their attacks.
 * So that's why the light hurts Malefactors. The Man Child guard believed they do!
 * This fits with the Good playthrough's explanation of Torque's transformation, too: he only thinks he's turning into a horrible monster with a blade for an arm, but that blade is able to rip them apart.

Doctor Killjoy Was Torque's Biological Father, And/Or He Killed Torque's Mother
While you're playing the second game, there's a bit where Doctor Killjoy (this troper cannot currently remember if it was a phone call, or the doctor popping in on a tv set) talks about Torque, and more importantly, Torque's mother. He wraps up this little revelation by saying, "Yes, I knew your mother." Now, there are only two ways this can be taken: one is that the Doc is talking in the biblical sense, meaning that he may be Torque's father (this could easily explain Torque's connection to the Malfactors, since it would mean that he was probably conceived ON THE FREAKIN' ISLAND THAT THEY CALL HOME). However, there's an equally disturbing possibility: this could mean that the Doc was responsible for killing Torque's mother. This would mean that the doctor was responsible for Torque becoming an orphan. Meaning that the doc was the one who ultimately turned Torque into whatever he is now. And if either one is the case (or both), then no wonder the doc is so fixated on Torque's development, since Torque is, in reality, the Doctor's own creation, whether due to biology, or the Doctor's actions.

Malefactors are involuntarily summoned by Torque
One possible interpretation is that Torque is a kind of empathic psychic (A Prime, to borrow the Foundation's term) whose powers manifest in the creation of Malefactors wherever he goes. It's possible that characters such as Truman are also afflicted with this condition, judging from how genre-savvy and philosophical he is about them while everyone else is terrified. What's more, this power only manifests when a person who has it crosses the Despair Event Horizon, triggering an initial uprising of Malefactors. Those Malefactors then have a chance of causing more Suffering which in turn has a probability of causing more latent Prime subjects to awaken their powers. Usually the Malefactors (Which are inherently self-destructive, like the very misanthropic horror they represent) kill their Prime originator, causing them to cease existing, but in Torque's case he is such a Badass that they can't seem to lay him low, despite the fact that the longer he lives the stronger and more numerous they become. Of course Torque has been so distracted by his own personal demons thus far he hasn't even considered this yet, so a hypothetical third game would have him realise this.

None of the monsters in the first game exist
Torque just wanted to break out of prison. He got a shank and went to friggin' town. All the monsters? Just guards and prisoners who got in his way. His allies buy into the monster delusion so he won't kill them. The ghosts who speak to him are just his conscience battling it out.