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Residential vs. Commercial and Mortgage Lender Issues Residential PACE programs operate in fewer states than does commercial PACE, but the overall residential market size is considerably larger than the commercial market in the states where it does exist. Residential PACE faces challenges due to the FHFA guidance preventing federal mortgage underwriters from underwriting mortgages subject to a PACE lien. However, residential PACE is still possible for homeowners without a mortgage, and for mortgages backed by the Federal Housing Administration rather than Fannie or Freddie. Lender Consent Provisions requiring lender consent from lenders of existing mortgages before entering a PACE contract are helpful in obtaining political support from the banking community. However, these provisions make residential PACE extremely difficult to develop, as banks are unlikely to consent to PACE liens being placed on residential properties. Commercial PACE is less affected by lender consent, so if a commercial -only PACE model is decided on, lender consent provisions would be advisable to include in the PACE legislation. If a residential PACE program is envisioned, lender consent is not advisable. Even if lender consent provisions are not included, lender notification requirements should be included in the legislation. PACE - enabling legislation should also include specific eligibility criteria and underwriting standards; this may help to alleviate the concerns of home mortgage lenders. Mortgage Seniority Another option available to make mortgage holders more comfortable with PACE is to make PACE liens junior to first mortgages. Vermont has pursued this strategy with some success (Adamczyk, 2012). However, making PACE liens junior to mortgages makes them riskier for the PACE financing providers, as defaults become more likely. To counter this, Vermont created a loan -loss reserve program which compensates financing providers that face losses due to defaults (Adamczyk, 2012). The loan -loss reserve fund is partially publicly financed, so this option is probably not feasible in states without the willingness or ability to provide public money to support PACE. In general, making PACE liens junior to mortgages reduces the advantages of PACE and therefore its attractiveness to both property owners and financing providers, and is probably not advisable for North Carolina. Mortgage Acceleration State laws differ on whether defaults on a PACE financing arrangement legally induce an acceleration of the payment of the entire loan amount; most states do not have acceleration (PACENation, 2010). Laws that require such an acceleration may provide more security for the funders of PACE projects (whether private or governmental). However, acceleration also places burdens on property owners and mortgage holders, given that PACE liens are typically senior in priority to mortgages. Federal policy has encouraged non - acceleration for PACE defaults (Zimring & Fuller, 2010). Open vs. Closed vs. Hybrid Market An "open" PACE market allows multiple PACE financing providers to operate and negotiate with customers directly, whereas a "closed" market gives one provider exclusive rights to operate in the market. Closed markets can vary depending on the type of financing they are using. State or local government can function as the sole financial provider. Alternatively, a for - profit company can be given an exclusive contract to both manage the project and provide financing, or financing can be provided through the bond market, with the program administrator offering financing to customers, but obtaining this financing through the bond market. Having an open market does not mean that public entities do not participate; Connecticut's PACE program, for example, has used public funding and a public administrator (the Connecticut Green Bank), but allows for customers to negotiate their own financing (NASEO, 2016, P. 5). North Carolina State University 1919-515-3480 1 www.nccleantech.ncsu.edu