This quote is part of a general description of the storm that is raging over the water which characterises how dangerous it was to go out on the ferry boat and to leave the safety of land. In this stanza, one of the key features is the way that the storm is personified, and this is certainly something that describing it as being the result of a "water-wraith" helps achieve:
By this the storm grew loud apace,
The water-wraith was shrieking;
And in the scowl of heaven each face
Grew dark as they were speaking.
Note how heaven is given a "scowl" as it is imagined as some kind of angry person, paralleling in fact the anger of Lord Ullin at his daughter's elopement. The "water-wraith" helps convey the violence of the storm and its impact on the water, because not only does it help imagine a supernatural being causing the turmoil but it also conveys the intensity of the tempest through the picture of this water-wraith "shrieking," with the use of onomatopoeia here enacting the sound of the water as it is churned and whipped by the elements. What is key is that even though the storm is described to be so ferocious and so intense, Lord Ullin's daughter would gladly face that than the anger of her father.