This article is absolutely fantastic.

I found it digging for an answer to your question. It does a great job summing up the history of the films so I will not go into detail here, as the article will do a better job.

What the man, Wong Fei-Hung, actually did in his life is a historical puzzle, as the man has slipped into legend. He was not a figure like Mao Ze Dong or the Emperor of China. There isn't going to be many written sources on exactly what he did and how his life went. Much of the information about the man is hearsay and second hand accounts from friends, family, students, etc.

If there is going to be an in-depth look into the specifics of the man, not the legend, the sources are going to be in Chinese.

As for why he's so popular, Wong Fei-Hung is a more recent iteration of a genre that has always been popular in China.

Wong Fei Hung extends out of a tradition known as Wuxia. It is an ancient meta-genre of Chinese literature that is exemplified in The Water Margin, where a band of quirky youths with supernatural powers band together to cause a ruckus, eventually leading to them becoming heroes through their martial prowess. The theme of young men doing good through the use of martial arts is one of the oldest tropes in Chinese culture.

The trope has extended itself comfortably into modern media. The entire martial arts film genre in China is the spawn of this ancient lineage of storytelling.

Many Japanese anime targetted at young men and young boys also follow this ancient formula: Dragonball, Bleach, Naruto, and One Piece to name the most popular ones.

The trope is even prevalent in other ancient Chinese novels such as Romance of the Three Kingdoms. Despite ROTK's focus on political intrigue and historical fiction, there exists certain characters such as Zhao Yun and Guan Yu who do feats that make them borderline superheroes.

Journey to the West also prominently displays this trope. Zhu Bajie, Sun Wukong (the same Goku, from Dragonball), and Sha Wujing have a big fight almost every chapter with a different monster, demon, seductress, or shapeshifter.

It may seem I'm going off-topic, but you asked why he is folk-heroes level of legendary. The answer is that he is an extension of a trope that, by its very nature, tends to create legendary and admired heroes in Chinese culture, and that the massive body of work in films cements his identity in the Chinese mind. Since he is so established, if they do another martial arts movie set in the 19th century that involves a hero battling evil with martial arts, the movie has to either take a risk on a person nobody has heard of, or they use the name Wong Fei-Hung and call it a day.

Why he is such a prominent figure is because he is a Marty-Stu that fits all the best ideals of Chinese culture. He is fatherly and confucian in his older years, scholarly and a gentleman (and even a doctor) in his mid-years, and gregarious and optimistic in his youth; All the while the man is always stalwart and heroic in every depiction. The character is a malleable "Superman". His superpower isn't as defined as "impervious to bullets", but it can be described as, "can beat anyone in a fight", which is narratively the same thing.

What makes Wong Fei-Hung special is his specific place in the 19th century. His stories exemplify the major ills and problems of China during that pre-modern period. His life is also a perfect bridge between the old and the new. At his youth China was a pre-modern society of old traditions where the Qing dynasty seemed rock-solid, but at his maturity China was opening railroads and importing firearms and the imperial administration was in freefall.

He is most often placed in a position where he fights the injustice of foreign oppression, Western influence, and the corrupt Qing government that colludes with them. The man lived at the height of the Opium Wars and European imperialistic ambition, so his life and story become a lightning rod for stories that need to have a straight-forward villain. Everyone in China accepts that foreigners were the devil in the 19th century, just as everyone automatically associates Nazi with pure evil in American films.

The slowdown in Wong Fei Hung films is an interesting development. Personally I feel they have continued, but the name has been worn out and the industry simply feels they cannot top the Once Upon a Time in China series.

The name has simply shifted to other characters such as Huo Yuan Jia in Fearless (2006). Or, the "obvious villain" has shifted from westerners to Japanese invaders in the very successful Ip Man (2008) and the series that movie spawned. The characters are similar, familiar, heroic, and the tropes endure.

Ultimately, I think nothing made the particular man "folk-hero levels of legendary", but rather that Chinese culture seeks to find and identify those who could fit the mold. Everyone loves a folk hero who can beat anyone in a fight and right all the wrongs of society, and Wong Fei-Hung was that character for the 20th century.