Thanks for sharing more information about her and her mother. Believe it or not, I did much of the same kind of stuff. I had my sister living with us (more than once) trying to help her work her life out....while I was totally ignoring my own H! Sad thing about it....I didn't even see what I was doing b/c he never complained. So, it took "life" and me maturing more to finally understand that I could not, and should not undertake my relatives problems as if it were my own....but rather take care of my own business.
Your W was trying to help her mother in a really bad time, but when you take a parent to "raise"...you do not do them any favors. If your W tries to make all her mother's decisions and protect her, and all the other ways, your MIL will get to the place she won't think for herself and will actually become like a helpless cripple. Then, somebody will "have" to stay with her all the time. I understand b/c I felt all those things for my mom when my dad died. Giving them love and support is what they need, and it could be easy to carry it too far. I'm like your W.....and I have a really hard time keeping things in my life balanced. You're not in a good position right now to try to point this all out to your W. It's a bad situation, but saying anything at the moment would be a very bad mistake. But this helps us to see what kind of stress is added on your R.
Here's what I suggest. Since she has admitted that she doesn't want to come home b/c of all the chaos, then you need to do all that you can to make home a calm and happy place. From what you've said, you are already stepping up with the kids.
When both parents work and come home for their second job (ugh) and face parenting little kids....it can become more weight than our bodies can carry. Something will start to break down. I see this more and more with young families. They are spread too thin.
If you and your W agree, or if she'll at least support you, then you need to lay down some rules with the kids and then you'll have to be the enforcer. Let me warn you, that means daddy will have to be the bad guy occasionally (maybe a lot at first), but it is well worth it in order to have peace in your home and when you take them out. Nobody else is going to raise your children. Don't give them a big long list of new rules to start out. Keep it simple. Start out with maybe three. Here's my suggestion:
1. No fussing/fighting. 2. No tattling (unless someone is hurt or in danger). 3. Do what you're told the first time.
Now #3 will be where they will test you the most. My parents never, ever told me but one time and I obeyed them. If I hesitated, they may ask if I heard them (which was the only warning I'd get) and then if I didn't move very quickly, I paid the consequences. There was no yelling, period! It was all done with calm authority. I used the same rule with my children. I wasn't abused and neither were my children. And guess what? Nobody ever minded seeing us come to their house with our kids, b/c they minded us.
So, didn't mean to beat your ears down, but I promise if you'll have your kids stick to those three things, it will bring more peace and harmony in your home than you can imagine. The children need to see their dad in this role of authority over them. You can still play with them and have a great time together, but they need a father to keep order. Once you get them headed in the right way, then you can add another rule, like "no yelling inside". Yeah, that one really helps the nerves! (lol)
Okay, so with all these changes you're making, don't expect your W to jump into the air and click her heels. She believes it won't last. She believes you are doing these changes to get her back, and truth is....you are. Hopefully, you will be determined to work to improve things at home and also to improve yourself, but we both know that your main goal right now is to save your M.
So do what you can to help with chores, etc. but please don't to do all the housework, b/c it will not accomplish the desired effect on the R. (Too long to get into all of that right now.)
It is not about what you feel should work in your M. It is about doing the work that gets the right results. Do what works!