seagul is right, and that Loreid spends the days he can't remember doing things he'd rather forget -- the sequence where he seems to remember dragging a body down a hallway would be one of those.
It's also possible that Loreid's gone completely bonkers, and imagines the entire scenario from the confines of his cell (his apartment hallway does seem very similar to the hallway in the mental institution near his cell).
I prefer to think that Loreid's sane, that he's been under the influence of a drug that he unknowingly inhaled at the Field mansion, and later that he unknowingly ingested in his medication. I think the sequences where you see a bug crawling around are the dreams influenced by the drug (including the dream where you see the bug in the medicine cabinet).
There seem to be two factions in the game, plus some innocent third parties. One faction is Loath Nolder and Edward Braunbell (these seem to be the "good guys"). They've stumbled across some of the bad guys' activities and are traveling and researching to try to figure out what is going on.
The other faction is the crew at the Witch's cottage, including Ivar Bergen, Christopher Dreaden, Gerald (don't know his last name) and Curwen. There are others involved -- represented by the initials in letters at the cabin that don't match the names of the people whose full names we learn. I think we'll learn more about these people in games two and three.
The witch's cabin crew seem to be the "bad guys." They kidnapped or otherwise "eliminated" Braunbell when he was becoming inconvenient. They also were behind the ceremony that called up the spirit of Loreid's ancestor. I'll bet they are the same people sneaking around the cemetary, digging up and burying bodies and wearing rings like that of Loreid's ancestral ring -- the people mentioned by the cemetary caretaker.
The witch's cabin crew refer to Edward Braunbell as "that old fool," and so does Loreid's police friend Arthur. This might indicate that Arthur is one of the bad guys, and since he was a friend of Loreid's he could have gotten into Loreid's apartment, put the letter in his wastebasket and the drugs in his bathroom. Arthur could even have adjusted Loreid's clock to confuse him. This would also explain why Clark Field told his brother not to go to the police.
Clark Field seems like an innocent third party who got involved just because he bought the house. Loreid seems to be involved because he was the policeman put on the case, but also because his ancestor is becoming increasingly influential, breaking into Loreid's mind somehow -- probably through the influence of that drug. When the eclipse happens, if nothing has changed, Loreid's ancestor will fully inhabit Loreid's mind.