Federal Reserve Chairman Ben Bernanke advocated for more government intervention in the national foreclosure crisis Thursday in remarks before a Fed housing conference. He called on government officials to take steps such as buying up bad mortgage debt and refinancing endangered loans into more affordable mortgages.

“Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy,”  Bernanke said. “More needs to be done.”

He also added that the housing crisis has “become inextricably intertwined with broader financial and economic developments,” citing the more than 2.25 million foreclosures expected to take place by the end of this year and the millions of homeowners who currently owe more on their mortgages than their homes are worth.

“A slowing economy has in turn reduced the demand for houses, implying a further weakening in the mortgage and housing markets,” Bernanke said. He added that “weakness in the housing market has proved a serious drag on overall economic activity. Steps that stabilize the housing market will help stabilize the economy as well.”

The Chairman recalled that the Fed has taken its own drastic measures to aid the faltering economy. It has lowered it target interest rate to 1 percent from 5.25 percent in August 2007. Many analysts believe the rate may be slashed again by a 0.5 percent point at its next meeting Dec. 15-16.

“To the extent that more accommodative monetary policies make credit conditions easier and incomes higher than they otherwise would have been, they support the housing market,” he said.

Bernanke suggested specifically that the U.S. government increase its efforts on the Hope For Homeowners program, a refinancing effort for struggling borrowers. He also recommended that the central government “purchase delinquent or at-risk mortgages in bulk and then refinance them into the (Hope for Homeowners) or another FHA program.”

The number of mortgage applications specifically for government-insured home loans continued to grow in October, according to recent data from the Mortgage Bankers Association.

The government-insured share of all applications (including Federal Housing Administration or FHA loans) rose to 32.9 percent during October 2008, the highest percentage since February 1991. It was also up dramatically from a 10.3 percent share last year at the same time. The percentage has steadily risen since the beginning of this year when it was 9.4 percent.

“This increase in the share of government-insured mortgage applications provides further evidence that there are still loans available to qualified borrowers, particularly through the FHA,” said MBA Chairman David G. Kittle. “The mortgage market remains fully operational and lenders are working to ensure borrowers with sufficient down payment and good credit have the opportunity of homeownership.”

The MBA suggested several reasons for the rise in popularity of government-insured loans over the past year.

For example, FHA loans are among the least expensive mortgages when it comes to down payment requirements. Borrowers can make a down payment as little as three percent of the total loan amount.

Another reason is that the Economic Stimulus Act of 2008 in March and then the Housing Bill in July raised the conforming loan limits, making it possible for those in high-cost markets to take advantage of FHA programs.

Additionally, borrowers with less than perfect credit will often more readily qualify for FHA loans than they would with loans from companies like Freddie Mac and Fannie Mae. +

Finally, FHA loans offer upfront mortgage insurance premiums which are often more attractive to buyers than paying hundreds of dollars in private mortgage insurance until the loan-to-value ratio reaches 80 percent or more.

As the economy becomes increasingly unstable, more and more borrowers are finding safety and financing availability with FHA loans. That will likely remain the case until the market reaches equilibrium again and investors return to mortgage backed securities arena.

A proposed $700 billion financial sector bailout bill passed in the Senate Wednesday night by a vote of 74-25, after the U.S. House of Representatives failed to pass a similar bill Monday.

The legislative package will give the federal government the authority and funding to buy up roughly $700 billion worth of soured mortgage and insurance securities from major corporate players that would otherwise face bankruptcy.

In an effort to pass the controversial piece of law, the Senate also included $150 billion of tax break extensions and an increase in the federal deposit insurance limit from $100,000 to $250,000.

Until now, public opinion about the bailout had been extremely negative, but the past week of dramatic Dow Jones dips seem to be softening the stance of many voters on this issue. The main concern has been that a “rescue” plan would reward companies for their risky behavior and encourage more bad choices in the future.

The House could vote on the Senate’s bailout plan as early as Friday and House Majority Leader Steny Hoyer was optimistic about the bill’s chances of passing.

“I think there’s a good prospect of getting that done tomorrow,” said the Maryland Democrat on Thursday.

House Financial Services Committee Chairman Barney Frank was more cautious in his predictions.

“It’s still uncertain. I think it is likelier to pass than before,” Frank, a Massachusetts Democrat said in a CNN interview. “The main change is reality. I think that it’s not possible now to scoff at the predictions of doom if we don’t do anything.”

In other mortgage news, a new government program to help troubled homeowners began Wednesday and is expected to help as many as 400,000 American families.

HOPE for Homeowners gives the Federal Housing Administration (FHA) greater ability to insure home loans for mortgage holders facing foreclosure because of skyrocketing interest rates on their ARM loans.

The plan allows the FHA to back up to $300 billion in refinance home loans, but lenders must voluntarily participate, writing down such loans to 90 percent of their current appraised value. Many  HOPE for Homeowners proponents believe most lenders will be happy to get these bad loans off their books.

Steve Preston, Secretary of the Department of Housing and Urban Development called the initiative a “helpful step forward” but added that “it must be part of a larger vision for the future, a vision that will help Americans keep their homes and remain financially secure.”

Borrowers interested in participating in the FHA program can contact their lenders, speak with a HUD counselor, or call 1-888-995-HOPE.