Among the hundreds of thousands of mortgages across the country that have turned sour is one held by a Vista gardener who, like most other Americans, just wanted a house for his family.

As did thousands of others, Mateo Martinez signed a loan application that showed his family's income to be considerably more than the actual figure.

It was what he had to do to qualify for the loan.

Martinez got it, moved his family in, and made the payments every month for the last two years, he said.

Then in January, he received a letter from his mortgage company and became a bit player in the largest financial drama to play in the United States since the Depression. Lenders are struggling to decide: What to do with all the bad loans? Borrowers are struggling to hang on.

Martinez bought his $536,500 Vista house two years ago with a stated-income loan, one of a swath of exotic mortgages that have widely become known as "liar loans."

Now his home is in foreclosure.

One thing separates Martinez from the thousands of North Countians who have lost their houses to banks: He never missed a mortgage payment, according to mortgage statements viewed by the North County Times.

His mortgage broker, Pascual Barajas, said Martinez could not afford any house in the area by reporting his income accurately. So Barajas included other sources of income and came up with $12,000 per month, showing it to Martinez for approval, Barajas said. He earns about $25,000 a year.

"I had no idea" that Barajas inflated the income, Martinez said. He said he had no knowledge that it was a "liar loan."

The misrepresented income was needed to qualify for the loan, which carried a monthly payment of about $4,000. Martinez said his family has kept up with payments by working odd jobs and relying on renting rooms to his sons.

It is a crime to lie on a mortgage application. As of Friday, no charges had been filed against Martinez or Barajas or anyone else involved in the house sale.

In January, according to a letter provided by Martinez to the North County Times, PHH Mortgage of Mount Laurel, N.J., demanded that Martinez prove that a business listed on his mortgage application existed and that he earned the income declared.

PHH declined to comment.

Government on the hook

PHH now has more company in dealing with troubled loans -- the federal government.

A $700 billion bailout bill that President Bush recently signed into law means that the government soon could face the same question, as the legislation gave the Treasury authority to become the holder of thousands, potentially millions, of mortgage-related loans. How much clout the government would hold and which mortgages would be affected might be tough to determine because it is not clear which provisions in the 451-page bailout the Treasury will act upon.

While the details of who holds which mortgage and how foreclosures are initiated have been muddied by financial wizardry, the effects are very real for the Martinez family.

After their home entered foreclosure five months ago, Mateo Martinez said he and his wife slept little. Since the bank demanded payment in full, the Martinezes' mortgage payments have been sent back, he said.

"I'm upset because they didn't want to accept the checks. And they don't seem to want to help us stay in the house," Martinez said in Spanish.

But many of the nation's largest banks are content to simply collect payments -- not track down fraud, said several spokesmen on condition of anonymity.

"If somebody's current, I don't think that we care" if the borrower lied on the stated-income loan, said a spokesman for a multibillion-dollar bank.

Pervasive risky lending

Some of the security pools were filled with stated-income loans. The products were especially popular in California, where high prices meant that buying a house was too expensive for most of the population.

Of 1.16 million loans issued to riskier California borrowers, known as Alt-A and subprime loans, 795,450 were done with little or no documentation, according to data from the Federal Reserve Bank of New York.

During the housing boom, stated-income loans were widespread and carried a legitimate purpose because they allowed homeowners to count every penny they earned, including side jobs or their own businesses.

And because lenders did not require any proof of income, many analysts suspect that inflating the borrowers' income was commonplace.

And for many borrowers, including the Martinez family, the stated-income loans were coupled with interest-only or negative-amortization features, meaning that payments remained low for as long as five years before jumping significantly.

During the housing boom from 2000 to 2005, San Diego County houses appreciated 20 percent to 30 percent each year. Lenders bet that any appreciation would allow borrowers to refinance out of the liar loans before they couldn't afford the payments.

When prices started to decline toward the end of 2005, borrowers were stuck with mortgages they could not afford and no means of escaping the payments. Defaults have become so prevalent that nonpayments have contaminated security pools that were considered safe, investment-grade vehicles.

In many of those cases, foreclosure might be the only option, said Stephen Wacknitz, president of Temecula Valley Bank.

If foreclosure were a certainty, it might be best for a lender to absorb the losses sooner rather than later, especially considering a local real estate market that has lost as much as 3 percent a month this year.

"I think that people have to bear responsibility for their actions," Wacknitz said. "And if there's a problem, it's the people who are losing their homes. But I don't know what more you can do."

Whether foreclosure on the Martinez home was inevitable is uncertain.

The house has lost almost $200,000 in value since the family bought it in 2006, dropping from $536,500 to $350,000, based on comparable listings and county records.

But Mateo's wife, Eloisa, said the family was planning for the payment increase three years down the road. And when asked how long the family planned to stay in the home, she said in Spanish, "All our lives, if everything goes well."

Staff writer Edward Sifuentes contributed to this report. Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at nctimes.com/blogs/minding_your_business.