We have a consumer real estate purchase loan originally at 95% LTV based on lower of cost($238M) as opposed to appraisal ($240M). PMI was obtained when loan made in 1990. In August, 2002 PMI Customer requested dropping the PMI and paid for a new appraisal that shows appraised value at $316M. However, customer's balance is still high only $222M and would be 93% based on the $238M, the lower of cost and the new appraisal. Loan officer dropped the PMI based on the appraisal

The 2000 amendments allowed for considerations of new appraised values based on refinances or modifications. In this case there has been no refinance or modifications.

Is there a problem of dropping PMI only on the basis of a new appraisal and not the balance ? Thanks

No. The alternative would be to lose the customer to another institution when they refinance their loan.

If you sold the loan in the secondary market and are still servicing the loan, then the Fannie Mae or Freddie Mac servicer guides will have some specific guidelines on early termination of insurance. You might want to look at those.