Explain that your brother has a crazy business/product idea, and that he's about to get a 2nd mortgage on his house, raid his 401k and quit his job. His wife is a nervous wreck, afraid that they'll lose their house and retirement fund, and he's hit your parents up for seed money that they really can't afford to lose. Your parents and your sister-in-law have come to you for help to try to talk him out of his hair brained scheme.
Suggesting that it's your brother's idea is a good move, because people will often avoid giving negative feedback in person. With this approach, however, you'll really elicit all the negative feedback they can come up with.