Following is an excerpt from my Introduction to Folklore that addresses this question:

The answer to this question is somewhere between "we don't know" and "it's just what people do" – that is, they invent these sorts of stories. Several folklorists, including the late Alan Dundes and Jan Harold Brunvand, recognized an opportunity with recent urban legends to finally track down "the source," the point of creation, to better understand how stories originate. For the most part, they were unable to find the point/person of origin to any general degree of satisfaction. It is a maddening question, and much like the proverbial chicken and the egg, it isn't likely to be resolved.

People tell stories. People repeat stories. And as they repeat them, people modify stories, which sometimes results in the birth of new stories. There might have been some highly imaginative, creative people who invented stories at some point, but that sort of person has yet to be identified in the annals of folklore studies. Folklorists often asked renowned storytellers to tell a new story, to invent something that they had not heard. Without exception, these requests were refused by the storytellers who explained that while they repeated stories, they did not invent them. In general, it may be best to consider the possibility that the process of repetition and transmission is the source of much of the creativity that is evidenced in the international library of oral tradition.

One example may help shed light on the creative process: the Cornish droll tellers were known for their wild adaptation of the material they heard. Their counterparts in Ireland were the "seanchaithe," professional storytellers who prided themselves in the faithful recitation of stories they had heard, as close to the original as possible. Perhaps in this, we can see the opportunity for new stories to be born, and indeed, Cornish oral tradition includes more than its fair share of distinct subtypes (i.e. variants) of legends and folktales, perhaps offering a hint as to how these things may come into existence.