Mortgage finance company Freddie Mac will no longer buy investments that include a controversial type of mortgage critics say has contributed to an increase in delinquencies and foreclosures, sources familiar with the plan said Monday.

The company will announce early Tuesday that it is eschewing "2-28" adjustable-rate mortgages, which have been popular among borrowers with damaged credit, said the sources, who asked not to be identified.

The company will no longer buy investments that contain those mortgages unless they meet tough new underwriting standards, the sources said.

Richard Syron, Freddie Mac's chief executive, is expected to announce the plans at 8 a.m. EST Tuesday on cable news channel CNBC.

Story Continues Below

Regulators and Capitol Hill lawmakers have been scrutinizing the 2-28 mortgages, known informally by some in the lending industry as "foreclosure loans," Senate Banking Committee Chairman Christopher Dodd said at a hearing this month.

Such loans let borrowers make low payments for the first two years. Roughly four out of five mortgages to borrowers with blemished credit are 2-28 loans, Dodd said.

Regulators have promised to issue new standards for how lenders should manage such mortgages but have been vague about when they will issue the new guidelines.

Only borrowers who can immediately afford the higher payments on a 2-28 loan should qualify for one, Rep. Barney Frank, chairman of the U.S. House Financial Services Committee, wrote in a letter to regulators this month.

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.

Editor's note:
Sir John Templeton warns of market, housing crash – Read More Here
Investors are making fortunes in commodities – find out how you can too – Go Here Now