Financial stocks and exchange traded funds (ETFs) declined after shares of Merrill Lynch & Co. Inc. (MER) fell to their lowest level in four-and-a-half years.

The drop came after the bank said it was getting out of the subprime lending business, reports Wanfeng Zhou for Thomson Financial. Down in midday trading were the Financial Select Sector SPDR (XLF), which holds 2.1% of Merrill Lynch, and the iShares Dow Jones US Financial Services (IYG), which holds 2.7%.

In a sign of ongoing trouble plaguing the housing sector, home foreclosures rose to a new high in the last quarter of 2007, says Jeannine Aversa for the Associated Press. The proportion of homes that went into foreclosure hit 0.83%, which passed the previous high of 0.78% reached in the third quarter. The hardest hit homeowners are those with subprime adjustable-rate mortgages.

The homebuilders sector took a left hook, too, as pending home sales data fell short of predictions. The National Association of Realtors was unchanged from December’s level of 85.9. Economists had estimated it would be 86.2, reports Tomi Kilgore for Thomson Financial.

Both iShares U.S. Home Construction (ITB) and SPDR Homebuilders (XHB) fell on the news and are on track for their lowest close since Jan. 22.

Tags: Financial, Homebuilders, Real Estate, Sector ETFs