THE LONG stalemate over the nation's two big mortgage companies may at last be breaking. For several years, critics have argued that the two companies, Fannie Mae and Freddie Mac, were not only huge but also unstable: Their approach to managing financial risk was cavalier, and if they fell apart the taxpayers would have to rescue them. The lenders replied that their financial controls were watertight, and until recently proof to the contrary was lacking.

Last year, however, a report on Freddie Mac, the smaller of the two firms, said that the company was massaging its financial results. Last week a 198-page report on Fannie Mae delivered a similar verdict.

The new report on Fannie Mae describes a pattern of manipulation: Executives underreported earnings some years and overreported them in others, thus smoothing the firm's apparent performance and, in the case of a particular maneuver in 1998, boosting executive bonuses. The eight-month investigation also unearthed doubts as to whether Fannie Mae kept enough capital on hand to protect itself from bankruptcy in the event of unexpected shocks, and it raised a question about "the overall safety and soundness of the enterprise."

Fannie Mae may challenge these findings, perhaps even successfully. But the report's apparent lesson here is the same as the one taught by Enron and its successor scandals. Senior executives whose bonuses are linked to their companies' reported earnings face powerful incentives to manipulate those earnings; restraints on such manipulation are feeble.

Fannie Mae's auditor, KPMG, apparently felt unable to challenge the lender's use of unorthodox accounting techniques; an employee who questioned these techniques was ignored. The upshot was that the final word on Fannie Mae's accounting methods seems to have come from the top managers: The same group of people that set Fannie's earnings targets and stood to benefit from meeting them.

But the report also points toward a second lesson. Fannie's long-standing critics may be right: There is a risk that one or other of these mortgage lenders might be mismanaged into a collapse, threatening the banking system unless taxpayers rescue it. Fannie Mae is the second-biggest financial institution in the country, which means it is too big to fail; it follows that it is too big not to be regulated aggressively. The Bush administration and Federal Reserve Chairman Alan Greenspan have urged tougher regulation, but efforts have bogged down in Congress. It is time to revive them.