Moody's reviews Provident Funding for trim

Moody's Investors Service said it placed on review for downgrade Provident Funding Associates, LP's B1 corporate family and B2 long-term senior unsecured ratings. “The rating action was prompted by the recent further, significant decline in interest rates that will likely pressurize the company's liquidity and capitalization,” said the agency in a press release.

A decline in interest rates lowers the value of Provident's mortgage servicing rights, pressuring its liquidity and capitalization, absent any mitigating factors, such as hedging. The lower value of the MSR portfolio will cause in turn a reduction in liquidity due to margin calls from providers of the company's lines of credit.

Lower interest rates usually translate into an increase in refinancing volumes, with a positive impact on profitability. During the review, Moody's will focus on the effect on the firm's liquidity, capital and profitability from the recent decline in interest rates.

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