With Yato's update all his blight (a physical representation of guilt and negative thoughts) had to go somewhere, so the nightmare bunnies absorb some of the blight, taking on a familiar form - that of his father's masked wolf ayakashi. Masked ayakashi are drawn to those already feeling negatively and are capable of possessing a human, driving them to act on those impulses, be it to hurt themselves or others. The wolves also are violent entities themselves, physically attacking those who get in their way.

The only way to get rid of the offending ayakashi is to destroy their masks with dreamotion or by thinking positive thoughts, although they can be defended against with a dreamotion barrier.

Upon being defeated their masks reform sans ayakashi, allowing them to be worn by people, with the effect of bringing forth negative feelings and animal-like traits, along with blighting the individual who'll then need to seek out purification water or be showered with positive emotions to be cured once the mask is removed.

Further reference: (Masked ayakashi, images: 1, 2)