One question people always as me is how the bond market plays into interest rates.  Furthermore they want to know what will happen to loan modifications if interest rates go up.

To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.

Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.

“If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity,” said economist Ed Yardeni, who runs his own investment firm. “Even worse, they could abort any necessary recovery in home sales and prices.”

All of this points to a potential unwhinding of recent market gains.  Ultimatly it could stall a recovery.  This however does not affect the loan modification movement in any way.  If anything this furthers the cause. 

As interest rates rise, the ability for home owners to refinance out of thier high rate loans, diminishes.  They will have a greater need to do a loan modification if they cannot refinance in the traditional sense.  Currently there are 9 million homeowners in the United States who need a loan modification.  It will take more then a year to get to all of them and even longer to write the negative assets off the books of the largest banks.

All of this translates into one common theme; Loan Modifications are here to stay.  As long as there are homes on the market with loans greater then the value, banks will have to modify existing loans to someday realize a return on thier investment.