When you kill something that is part of a faction, in this case the Keltrath Undead, you become less and less popular with them .. they remember you are aggressive towards them. It takes a while but you can become an enemy and get attacked ahead of players who are not an enemy.
You also increase your standing with the Keltrath population though, so they like you more and more. You are doing them a favour clearing out the Undead.
Killing Keltrath citizens will improve your Undead standing. But watch out for the peacekeepers as your standing with Keltrath will go down and they will target you if you become an enemy.
The faction standing system will grow and become more and more relevant as the game grows.