Standard & Poor’s backtracked Friday, reversing ratings reductions the firm made a year ago on 32 classes stemming from seven residential mortgage-backed securities transactions. The agency’s admission that it incorrectly lowered the deals’ outlook using wrong loss severities data could reignite ongoing debate about some of the perceived weaknesses in the rating agencies’ long-term assessment of RMBS deals. S&P said it used incorrect loss severities data when projecting losses on the RMBS classes impacted by last year’s lowered ratings outlook. This realization prompted S&P to move those ratings upward, while also lowering ratings on 105 classes from 11 RMBS transactions and removing seven deals from negative ratings watch altogether. It’s standard for investors, especially those in the RMBS market, to require positive ratings from at least two independent ratings agencies before diving into an RMBS deal. But today, the ratings firms’ role in sizing up the safety of RMBS deals is drawing a critical eye of lawmakers and financial researchers. The Senate Permanent Subcommittee on Investigations released its findings from a two-year study in April, saying “inaccurate triple-A credit ratings” from some credit ratings agencies introduced risk into the financial system and “constituted a key cause of the financial crisis” that occurred in 2008. The report went a step further, alleging massive downgrades made by the credit ratings agencies a few months before the financial meltdown “precipitated the collapse of the residential mortgage backed-securities and CDO secondary markets” since the changes were “unprecedented in number and scope.” The report added “more than any other single event (the downgrades) triggered the beginning of the financial crisis.” At the time of the Senate report’s publication, S&P responded saying the “actions we took to downgrade U.S. RMBS and CDOs in 2007 and 2008 reflected the unprecedented deterioration in credit quality, but were not a cause of it.” Last week, all three ratings agencies — Moody’s Investors Service, S&P and Fitch Ratings — were critiqued in a white paper from the National Bureau of Economic Research. The white paper asserted larger MBS deals received better ratings when compared to smaller deals formed in the years 2004 to 2006.  Researchers who compiled the paper also suggested large issuers that pay ratings agencies for their services land better ratings and higher yields on MBS products for lower prices. At the time of the report’s release, the three rating agencies said they would need time to review the study before commenting on its findings. The same firms  landed in the fray during the most recent U.S. debt ceiling crisis, with both Moody’s and S&P placing the triple-A bond rating of the U.S. government on review for a possible downgrade if the U.S. ended up defaulting on its debt or failed to raise the ceiling within an appropriate time frame. Write to Kerri Panchuk.