In just a few short hours, La Cabaña, the Mexican restaurant and nearby motel that Garcia’s parents opened in 1992, was not only flooded, but also much of the land on his property was washed away. All told, Garcia estimates, the hurricane damage cost him between $80,000 and $100,000, and insurance covered only $18,000.

Like many business owners who don’t operate in flood-prone areas, Garcia didn’t have flood insurance. He could collect insurance money only to fix the wind-damaged restaurant roof. He applied to the federal government for additional assistance and received $23,000, which he used to replace some furniture and make repairs to the motel unit where his mother lives.

“I’m at a loss for words,” says Garcia. “We never expected any flooding. Up here, we were really caught off guard; no one knew until it was too late.”

Many other businesses were similarly disrupted this year. In 2011, the U.S. logged 97 major disaster declarations, according to the Federal Emergency Management Agency. In 2006, the year Hurricane Katrina devastated New Orleans, FEMA recorded just 52 major disaster declarations. Such declarations can come from the President based on FEMA recommendations. The Small Business Administration also can make its own disaster declaration when at least 25 homes and/or businesses sustain property damage and at least 40 percent isn’t covered by insurance.

Although the federal government helped with Garcia’s losses, not every business will be eligible for such aid when disaster strikes. Preparation for the unexpected is critical. Here are four steps you can take to get ready:

Create a backup plan.
A backup plan, or what’s known in biz-speak as a “business continuity plan,” is a written document outlining how your company will respond to a disaster. You’ll want to ask yourself and key employees some basic questions: How will we keep filling and tracking orders? How will we communicate with suppliers if we’re not at the office? If vendors aren’t operating, do we have a backup? What if employees can’t make it to work?

The questions, of course, will vary depending on your business and its needs, but to get started, you can use a template at Entrepreneur.com for guidance. The Insurance Institute for Business & Home Safety, or IBHS, an association of property insurance companies based in Tampa, Fla., also offers a free series of eight planning sessions accompanied by assignments. By the end of the sessions, you should be able to complete your plan.

Get insured.
Plenty of businesses have insurance in case of a fire or a burst water pipe, but chances are most aren’t protected in the event of an earthquakes or flood — especially if they aren’t located near fault lines or floodplains, says Gail Moraton, a business resiliency manager for IBHS. Although such disasters are rare, businesses should note that many standard policies don’t even cover wind damage from a hurricane or utility disruptions from a storm, Moraton says. She suggests carefully reading your policy’s fine print to understand your coverage.

You may want to consider adding a rider or a separate policy to cover losses from severe weather that aren’t included in your existing insurance policy. The average flood insurance policy is about $600 a year, according to the National Flood Insurance Program. The average rate for a policy purchased through the California Earthquake Authority, which offers California residents catastrophic earthquake insurance, is about $700 a year. Note that the cost of coverage will vary widely depending on how much insurance you buy, what it covers and your property’s risks, Moraton says. Extra coverage should be available in all 50 U.S. states.

Mitigate risks.
As much as possible, try to anticipate risks and mitigate them. For instance, if you need a server to operate your business’s website, have an alternate you can switch to. The same goes for electricity: Keep a generator handy.

If you know a storm is coming and you can’t easily transport your office or retail shop to higher ground, try to protect as much merchandise, inventory and equipment as possible. Moraton suggests moving computer towers and other essential, valuable equipment off the floor and placing as much inventory as possible on higher shelves or in other more protected spots. Also, digitally back up all of your business’s vital financial documents or keep copies in another location.

Seek assistance.
The Small Business Administration can provide some financial help. Through the agency’s Office of Disaster Assistance, business owners can apply for low-rate, long-term loans for physical damage caused by a declared disaster. Currently, eligible small businesses may borrow up to $2 million for up to 30 years to repair and replace real property, machinery and inventory at a 4 percent interest rate, according to a SBA spokeswoman.

The SBA also offers an economic injury disaster loan that provides working capital up to $2 million. It can be used for operating expenses the business could have paid if the disaster hadn’t occurred, even if there isn’t any physical damage. The current rate for a loan of up to 30 years is 4 percent.

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.

In recent years, hundreds of credit unions have introduced short-term loans for members who face a temporary cash crunch. But some of the loans “are only marginally cheaper than traditional payday loans,” says Lauren Saunders, an attorney with the National Consumer Law Center.

The National Credit Union Administration, which regulates federal credit unions, last week issued guidance to its members, alerting them to the “risks, compliance issues and responsibilities” associated with a short-term loan program.

The agency issued the letter in response to the rapid growth of these programs in recent months, says John McKechnie, spokesman for the agency.

Federally chartered credit unions are prohibited by law from charging more than 18% on loans, but some charge excessive fees that drive up the effective rate, Saunders says.

For example, Nevada Federal Credit Union says it offers a 0% annual percentage rate. Brad Beal, president of the credit union, says it charges an application fee of $70 for a 14-day loan of up to $700, or $60 for members with direct deposit. That’s half the fee charged by the average payday lender, he says. But the National Consumer Law Center points out that a $70 application fee for a $400, 14-day loan is the equivalent of a 455% APR.

Saunders’ consumer group has recommended capping the annual interest rate for payday loan alternatives at 36%, including fees. But Beal says that works out to less than $10 per loan and wouldn’t cover his credit union’s costs.

“We’re not out to take advantage of our members,” Beal says. “We’re just trying to find a way that’s economical for them and economical for us.”

Lois Kitsch of the National Credit Union Foundation, the charitable arm of the credit union industry, acknowledges loans offered by a handful of credit unions resemble traditional payday loans.

But, she says, “there are a huge number of others that don’t look like them at all.”

Many short-term loan programs offered by credit unions require members to deposit a small percentage of their loan payments in a savings account, Kitsch says.

“Eventually, they’ll have enough money so they can borrow against their own savings at a very low cost,” she says.

And unlike payday lenders, Kitsch says, many credit unions give members 30, 60 or even 90 days to repay their loans.