This is such a loaded question with a lot of missing information.
It's hard to decide who really has the issue here.
As other posters have said, this I your husbands' story to tell.
Should you explain it to your kids?...... Have they asked about it?
If you decide to, please keep it simple such as, "Grandpa loves you, but sometimes adults have to do adult stuff and that must be what he is doing".
Your post is very drama filled, and I get it, but don't hand that baggage on to your kids. When they are older and can fully understand the impact of one's upbringing, it can be explained more.
But right now they just need to know that people are who they are and are doing the best they can.
ETA: sorry, but I just feel the need to add that this question is just too loaded to determine if this is really about grandpa being step grandpa, your concerns about your husband, your childrens' relationship with their dad, your MIL relationship with her ex, your MIL's relationship with her new boyfriend, your kid's relationship with the step grandfather or your wanting to talk about all these mixed and unspoken messages amongst family members.