Freddie Mac said 37 percent of those people off 30-year loans in a refinancing deal in the quarter chose a 15- or 20-year loan. It was the highest portion of borrowers choosing shorter loans since the third quarter of 2003.

In addition, 55 percent of refinancing homeowners in the quarter with adjustable rate mortgages chose to go with a fixed-rate contract, Freddie Mac said.

While the U.S. Federal Reserve continues to offer historically low interest rates, refinancing consumers are still trimming their expenses.

Fixed-rate loans accounted for about 95 percent of of all refinance loans in the second quarter. People with fixed-rate loans also tend to prefer them over adjustable-rate loans.

“Compared to a 30-year fixed-rate mortgage, the interest rate on 15-year fixed was about 0.8 percentage points lower during the second quarter. For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term,” said Frank Nothaft, Freddie Mac vice president and chief economist.

It is very simple. The Stiglitz argument is that, when information is imperfect, then government might improve the market, not that it necessarily will. To argue that government will always improve a market when information is imperfect assumes that governments are perfect, which is perhaps even less tenable a view than that markets are perfect.

Imperfect governments can make imperfect markets even worse. When that happens in the home loan market, I rant about it. Unfortunately, it is more the rule than the exception.

The most direct way for government to deal with the disparity between the information available to borrowers and the information possessed by lenders is for government to mandate that lenders disclose the information borrowers need. That should be a slam-dunk case for government intervention, but it isn’t. There are good disclosures and bad disclosures, and all too often the disclosures mandated by government are bad.

A good disclosure is one that is relevant to the borrower’s decisions, that is provided early enough in the process to be useful, that is consistent with and complementary to other required disclosures, and that is uncontaminated by garbage disclosures that are useless to the borrower but absorb his time and deflect his attention. Alas, there are all too few of these.

The federal government has been in the mortgage disclosure business for the past 30 years, with terrible results: garbage disclosures that are useless to borrowers, conflicting disclosures by multiple agencies involved in the process, disclosures so voluminous in total that borrowers cannot absorb them, and disclosures made too late to do borrowers any good. Maybe the new consumer protection agency created by Dodd/Frank will do it better — maybe.

Government intervention can also take the form of rules regarding what lenders and perhaps others cannot do, or must do, to resolve a particular problem that borrowers have. There are good rules and there are bad rules.

A good rule is one that accomplishes its objective at minimal cost. Bad rules don’t, for a variety of possible reasons: They don’t deal with the underlying cause of the problem, they are enforceable only by deploying an army of regulators, or they stimulate legal forms of evasion. One bad rule often leads to another bad rule.

A good illustration of good versus bad rules is dealing with the problem of excessive charges to borrowers for third-party services required by lenders, including title insurance, mortgage insurance, property appraisal, and closing services.

These services have always been overpriced because borrowers paid for them while lenders selected the service providers. Competition by third-party service providers took the form of services provided to the lenders who made the referrals, which raised the costs of the service providers, which costs were then passed on to borrowers in the price of the service.

A good rule for dealing with this problem is to require that all third-party services required by lenders be purchased by lenders, who would embed the cost in the price of the mortgage. Since lenders are knowledgeable purchasers and can purchase in bulk, the price of third-party services would drop like a rock.

A useful way to think about this is to reverse the scenario: Consider what would happen to the price of automobile tires paid by car buyers if, instead of being included in the price of the car, they had to be purchased separately from firms selected by the car dealer. Can there be any doubt that car buyers would pay more for the tires than they do now when the cost is included in the car price?

The proposed rule would accomplish the objective because it confronts the problem head-on by eliminating the referral power of lenders, and would require no costly enforcement system. Borrowers who were charged separately for third-party services would be unpaid enforcement agents.

But this rule has never been adopted. Instead, lawmakers fashioned a bad rule: They prohibited the payment of referral fees. Instead of eliminating the referral power of lenders, this rule attempts to police how that power is used, which is impossible without an army of enforcement agents.

Small players often ignore the rule against payment of referral fees, and large ones have fashioned legal mechanisms that get around it. Reinsurance affiliates that share the mortgage insurance premiums paid by the lender’s customers, and joint ventures with title companies who get their title business, are legal methods of paying referral fees.

Needless to say, prices paid by borrowers have not been reduced by the law prohibiting payment of referral fees that have not been legalized.

Why do we have such a bad rule when there is an obvious good rule available? Stay tuned.

Having negative equity, which is also known as being “underwater” on a mortgage, makes homeowners more likely to end up in foreclosure. It restricts a borrower’s ability to refinance or buy another home, which in turn stifles demand for housing. It even reduces the flexibility of the labor market, since underwater homeowners are less willing to leave town to take a different job, says Stan Humphries, the chief economist at Zillow.

“We have never had negative equity like this at the national level in as many different regions as we have now,” Humphries says. To get a better sense of the cities with the greatest concentrations of negative equity, Zillow provided U.S. News with data that detail the percentage of mortgage borrowers who are underwater in 142 distinct markets throughout the country.

Based on this research, we compiled the following list of America’s most underwater housing markets. (Please note: We chose no more than one city per state.)

Las Vegas

Las Vegas was ground zero for the housing market’s historic boom and bust. Loose lending standards and speculative fervor helped send home prices surging more than 104 percent from 2002 to their 2006 peaks, according to Moody’s Economy.com.

“We all knew in our hearts it was unsustainable and there had to be a correction,” says Larry Murphy, the president of SalesTraq. That correction came as the housing bubble popped and the economy tanked: Home prices in Las Vegas fell more than 56 percent from 2006 to the third quarter of 2009. This steep decline has pulled a vast swath of mortgage borrowers underwater.

“If you bought a home in Las Vegas since 2004 up to about 2007, whatever you bought–I don’t care if you bought a big house or a little house, in a great neighborhood or a crummy neighborhood–it’s worth about half what you paid for it,” Murphy says.

More than 81 percent of single-family home mortgages in Las Vegas had negative equity in the fourth quarter of 2009, according to Zillow. And it may take 20 years for some of these home values to climb back to the levels they hit at the peak of the housing boom, Murphy says.

Merced, Calf

The housing crisis that has rocked Merced, Calf., was initially linked to rising property values in relatively nearby metropolitan areas like San Francisco. As real estate became increasingly unaffordable in the bigger cities, many would-be home buyers started exploring options in smaller markets, such as Merced.

“A number of people said, ‘Hey, I have got a couple of choices: I can get a 1,000-foot condo in San Francisco, or I can move east and I can get myself a fairly significant home for the same price,’ ” says John Walsh, the president of DataQuick. Although this trend increased real estate demand in Merced, prices appreciated even faster as exotic mortgage products and investor interest hit the market.

Area home prices jumped nearly 129 percent from 2002 to 2006. But after the euphoria subsided, home prices crashed more than 72 percent through the third quarter of 2009. This rapid deflation dragged about 64 percent of single-family home mortgages underwater by the fourth quarter of 2009, according to Zillow. Walsh says it could be 10 to 20 years before Merced home prices reach former peak levels.

Phoenix

As exotic mortgage loans and investor demand swept through the market, home prices in Phoenix jumped more than 101 percent from 2002 to their 2006 peaks. Jay Butler, an associate professor of real estate at Arizona State University, says many people who purchased property in Phoenix during the boom felt pressure to get in on the action. “You had [real estate] seminars all over the place, you had ‘flip this’ shows,” Butler says.

“You were constantly being fed a barrage that if you weren’t actively participating in this thing, you were not only denying yourself a great bit of wealth but your kids [and] your grandkids.” But once the music stopped, the housing market in Phoenix was clobbered.

Home prices dropped more than 52 percent from their peaks through the third quarter of 2009. And as of the fourth quarter of last year, nearly 62 percent of single-family home mortgages were underwater, according to Zillow.

Long Term Debt – Financing used to purchase or improve assets such as plant, facilities, large equipment and real estate.

Maturity – A loan’s maturity is the life of the loan; that is, how long you have to repay the loan. It usually applies to term loans and not lines of credit.

Multi-Lender Environment – Numerous lending institution sharing the same site and information to provide instant financing to small businesses.

Personal Guarantee -A guarantee that the primary owner will assume personal responsibility for repayment of the loan, should the company not repay the loan.

Prime Rate – The rate a lender charges its best customers. The rate is calculated differently by each lender.

Revolving Credit – It is the same thing as a line of credit: an amount of money, which a business can borrow against at times it needs capital. Often accessed by check, ATM, or business card.

SBA Loan – Loans to small businesses unable to secure financing on reasonable terms through normal lending channels. The program operates through private-sector lenders that provide loans, which are guaranteed by the Small Business Administration (SBA) — the SBA has no funds for direct lending or grants.

Secured Loan – A loan secured by specific collateral. Creditor may foreclose and seize the specific property that is collateral to satisfy an unpaid secure loan.

Small Business Administration -Established by Congress, the SBA provides financial, technical and management assistance to help Americans start, run, and grow their businesses.

Short Term Debt – Financing used to secure cash for accounts payable and inventory.

Subsequent Draw Fee – It’s a fee that the financial institution may charge each time you use the line of credit after the initial use.

Term Loan – A loan for a specific amount of money. It has either have a fixed or variable interest rate, matures in between one and ten years and has a set repayment schedule.

TransUnion Corporation – One of three leading providers of personal credit information.

Unsecured Loan – A loan granted upon the good credit of the borrower. No collateral involved.

Variable Interest Rate – An interest rate that changes during the life of a loan.

Annual Fee – The amount charged by the lender each year to cover the administrative costs of the loan.

Business Credit Card – An amount of money, which a business can borrow against at times it needs capital. Using a card accesses the money.

Commercial Real Estate Loans - Similar to residential mortgages, but collateral is business property. Interest rates are usually fixed, the length of the loan can range from 5 – 20 years and payments due monthly.

Commercial Term Loans – Loans made to businesses that can be either secured and unsecured. Usually made to mid-size and large businesses.

Credit Rating – A predictor of the ability to pay back a loan. The credit rating is a result of credit scoring

Credit Report – Financial history supplied by a credit information company like Dun and Bradstreet, Equifax, Experian or TransUnion. Contains credit information on a business or an individual, including payment history of bank cards, store cards, mortgages, student loans, and trade payments.

Credit Scoring – The evaluation system used by lending institutions to determine relative credit riskiness of a business or consumer. When evaluating businesses, it generally considers factors such as credit payment history, new credit sought by owner of business, and financial strength and longevity of business.

CreditFYI – A web site for checking business credit reports

Debt Financing – A loan with pre-agreed terms, including payback schedule and interest.

Dun & Bradstreet – Leading provider of business credit information.

Equifax – One of three leading providers of personal credit information.

Equipment Leases – Leases allowing companies to purchase new equipment.

Experian – One of three leading providers of personal and business credit information.

Fixed Interest Rate – An interest rate that is the same throughout the life of a loan.

Interest Rate – The amount charged by a lender for the money borrowed. It can be fixed or variable.

Inventory Financing – Money borrowed on the basis of finished inventory. The loan is paid as inventory is sold.

Line of Credit – An amount of money, which a business can borrow against at times it needs capital. Often accessed by check, ATM, or business card.

The owners of Twilight Bistro are hoping to expand, but they said the market for loans is still tight.

“They want as much assets as what it is worth,” Twilight Bistro owner Joe Anglin said. ”If I had that I’d just buy it.”

Anglin said part of the problem is, the business is not only small, but new.

“We’ve been here less than two years, and our track record does show a profit, but still with only two years and not a lot of assets, we expected to be told no,” Anglin said.

“The greater the risk, which often comes in smaller start up companies, the harder it is going to be to get those dollars,” Tricia Hollander with Hillyard Lyons said.

Still, Hollander said there are more dollars to be had, and credit is starting to ease up.

“We tend to see the pendulum swing,” Hollander said. ”I think maybe we’ve swung so far in one direction that at some point we’ll come back to the middle.”

She said new credit card rules that took effect Monday don’t apply to businesses, but that exemption could have an impact.

Some banks may try to make up lost revenue on the backs of businesses, and some businesses may put their credit on personal cards.

That makes financial institutions nervous.

“That becomes a little bit of a muddy issue when businesses take on personal liability, so that is a concern,” Hollander said.

As for Twilight, they said their best bet for a loan right now is the small business administration.

They said the wait could be a little longer, but they believe it will work out in the end.

Hollander said some small businesses are avoiding expansion right now anyway because they are focused on getting their financial house in order.