What the Fed isn't fixing

Other predatory practices stayed out of the Fed's sights too. It didn't ban negative-amortization loans, which allow the consumer to pay back less than even the interest on the loan each month. The difference keeps being added to the principal, instead, leading toward a balloon payment that few homeowners can afford. The Fed also failed to regulate loan flipping, in which a lender or broker refinances a borrower into a new loan in a short period with little to no advantage to the borrower.

At the height of the mortgage frenzy, the Fed bought the mortgage industry's arguments that it should be left alone. Former Fed Chairman Alan Greenspan even argued in a now-infamous speech on Feb. 23, 2004, that nontraditional loans offer better value to the homeowner. The massive market failure of the last two years has revealed just how wrong Greenspan, the Fed and the home-loan industry were. But even now, as the Fed tries to make amends, it is falling far short of what is needed.

It's up to the states now to fill in the gap and close the loopholes. Legislatures in New York and North Carolina, for example, have gone far above and beyond the Fed's proposals to rein in out-of-control lending practices. California and other states should do the same.