There are considerable differences between liquidation prices and the broker price opinion (BPO) valuations provided when a mortgage-backed security (MBS) rating is issued, according to credit rating agency DBRS. The Toronto-based firm said many lenders and servicers have begun using liquidating trust structures — which are usually backed with the liquidation proceeds of nonperforming assets — as a financing option due to the "performance deterioration in the residential mortgage sector." In such a structure, a portion of the proceeds, which otherwise would have been used to amortize the bond balance, is almost always used first to cover interest payments, according to DBRS. This prolongs the pay-down of the rated bonds that necessitates increased credit support "to account for the 'borrowed' principal, resulting in higher credit enhancements than what the expected losses are for the pool" at each rating category," DBRS analysts said in a structured finance newsletter. Default probabilities for these pools have traditionally been at or very close to 100%, DBRS said. And "estimating the risk of such a pool becomes an analysis of loss severities, the key to which lies in the accuracy of the property values." On average, values dropped 10% to 20% in liquidation sales for properties ranging from $100,000 to $400,000 with declines much more pronounced, hovering around 40%, in properties worth less than $100,000, analysts said. When values are less than $50,000, DBRS said it’s not uncommon to see 100% market-value declines, or no recovery, when the properties are liquidated. The average updated BPO loan-to-value ratios at closing for securitizations recently reviewed by the firm generally ranged from 140% to 160%, and DBRS believes the market-value declines will moderate if the BPO loan-to-value is reduced. Write to Jason Philyaw.