Yep, BSA files are the last to be used. Oblivion and Skyrim and I am assuming Morrowind will use what is packed in a BSA file last. If you have loose files they will override a BSA.
When I made my Skyrim Halfsized mod I made a simple ESP that would trick the game into using the Textures I had packed into a BSA. All I changed was an actor and I didn't even change anything about the actor. I simply opened up the actor an clicked OK and it put an * by the actor showing that it was changed. It was a test actor by the way.
The problem was that folks couldn't seem to understand my clear instructions on load order of these ESP files. So I redid the mod into loose files and those override what is packed in Skyrim Texture BSAs without any worries about load order. The only thing though is that they also override original texture changes made by the UOPs but the textures in the UOPs whatever they are I have never noticed them.
The good thing now is that I am not getting any complaints about load order and it not working.
Anyways I downloaded a Texture Mod for Morrowind and it was all loose files so I thought I could make a BSA out of it and I did. Then I needed a small ESP file to trigger that BSA and I made one and registered the BSA with the INI but it didn't work. So Morrowind must be different in that way. I loaded the loose files into the game and it worked but it changed a whole bunch of stuff that I didn't want changed and being that there were hundred of textures I didn't want to risk deleting Original Morrowind stuff I once again reinstalled Morrowind.
OK a question. I have the Morrowind Mod Manager or whatever it is called and I think you can create files similar to OMODs with this and that would be one way to get rid of the problem of hundreds of textures. I could make a MMOD out of it all and then if I decided to delete it I could just deactivate the MMOD. My question is will Wrye Bash work for Morrowind? When I install Wrye Bash it only gives me options for Oblivion and Skyrim but I think there is an option to install to other locations. I'll have to take a look at that.