Right before his death, a group of demons called Dream Demons appeared to him and offered him a deal. In exchange for a certain level of immortality and the aforementioned powers, Freddy would be a pawn for them to terrorize the human race.
After accidentally being left with the inmates alone for some time, Amanda was found to have been sexually assaulted over 100 times and found pregnant. This gives Freddy the title "son of 100 maniacs" and his DNA combined with an abusive home life made him into the human monster that he was when alive.