Yes, the rear pads are pretty small.
Can you get someone with some experience to help you with this brake job? You are not only taking you life in your hands, but also the lives of your passengers, the pedestrian, the people in the car in the intersection, etc.

Now, it could be something as simple as brake fade -- the dragging brake generates so much heat the brake fluid (and/or moisture in the fluid) boils and the vapor is compressible so the pedal gets soft. Or it could be a bad master cylinder. Or several other things. Changing the pads is easy, but your rotors may be shot and that is a little more involved.

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1987 W201 190D