People who were paying their mortgages were effected by the general economic downturn, collapse of home values, and credit crunch, for some parts of which the bank bailouts were an ineffective remedy. (Bailing out troubled homeowners probably would have been more effective.)
> The bank needs money now so it will have to sell some of it's assets such as the house you're living in
Unless you are renting from a bank, it's not going to sell your house, because it doesn't own it; particularly, that's not how most mortgages work (there are some that are callable early where that would be a theoretical possibility, but they are almost never used for owner-occupied residential property.)
> The government effectively acts as a very large insurance company by giving the bank a loan.
No, it was acting as a very large bank. An insurance company would have recieved premiums in advance and not given loans, but just paid out money.