I am going to agree with you as well, with this specific set of facts. Both of the children's other parents have abdicated the parental role. The mother of one child even said that she wants to be called "auntie".
In an instance like that, I don't have a problem with a stepparent being called mommy or daddy. I have a serious problem with it when children DO have an active mother or father in their lives....even if that parent is only marginally active.
However, its also critical that the parents be honest with the children, in age appropriate ways, so that the children grow up understanding that there was another mother/father out there, in case that mother/father ever pops back into the child's life.
As far as adoption is concerned in this particular scenario, its far too soon to be contemplating that, in my opinion. The abdicating parents haven't been gone long enough, and the couple has not been married long enough.