Vertabum knows the story well.
Yet this is what I know,
Silent Hill 2 explains the history of this town (at the Museum), The town does exist, it's not fake, but it's being engulfed in darkness as Dhalia explained in Silent Hill 1.
During the same period of the Witch Trials in Salem, the same senario was going on in this town in Silent Hill during early America. Except these "Witches" worshipped "Samael", the God of "Everything" to this cult.
Alyssa (aka Cheryl, aka Heather in SH3) was needed to be a sacrifice to bring "GOD" back to this world, but Harry Mason tried to stop this, but only post-poned it until 10 years later.
James Sunderland and Mary Sunderland didn't really have a bad problem with Silent Hill to start with in Silent Hill 2...until late in the game you find out.
My Theory, each story, each person has a purpose to bring back that certain someone to Silent Hill. It is a gateway into Hell almost, when your time has "Come" the town will call to someone (Just like James got the letter from his dead wife who died 2 years ago, but he recieved the letter only last week..)
The Town has alot of history of murder, sin, and worshippers of Samael for over 200 years. Almost each street and building has a dark history.
As we have learned 3 times already, Silent Hill is not just a get away...it's a Curse...whoever enters will leave with some kind of bad memory and if they do survive it, it will only haunt back, just like they came to Harry
Also another theory is all the images, all the scary crap is a manifestation of your memories, projecting all your worst fears.
Now in Silent Hill 3, Vincent says to Heather "They are monsters to you?" and grins...apparently what I learned was all these creatures that are attacking you are human or some what...especially when in SH3 when the Nurses have guns now..
Plus notice all the health packets, serums, and ambles in SH1-2-3...They dont look like medicial supplies that looks legal...and a majority of cults will drug you to death and end up dead...except these health items help you...or do they?
Notice how much darker it gets or when the monsters get stronger later in the game, for some reason they don't want you to progress any more...
I would call it a drug trip..but that's just an ideal of how I think those health items effect the story maybe..