I think you have every right to be outraged.
However, I think your letter is kind of rambling, and on top of the errors in it, I think you spend too much time saying you want to be understanding and you want there to be "clarity". But that's not really what's at stake here. You seem to be taking way too much blame for the walking on eggshells and the air needing to be cleared, and asking her what she's upset about with you. Don't open this up for her to critique you.
I think the point is, you have given her a room and a kitchen and a bathroom, for $500 a month. She has taken a week's vacation for herself, and now she is going to Hawaii on her husband's business trip. He creeps you out but you don't want to say so. And are you caring for her daughters while she is off partying and relaxing?
Take out the sentences about how you don't want to hurt her feelings. Take out the part about being in the dark. Take out the part about how understanding you are trying to be about her excitement over a trip.
I think you need to tell her out straight that you need her to find a place and move out. Say that, since she clearly has money for 2 vacations, and you are cramped in your house with the 3 of them. While you valued her friendship at one time and opened your home to her, it's been one year and they have no savings. Still, they can take vacations. So their priority is to continue to live off you, and it's no longer your priority.
This is not about what another mother thinks about her husband. It's about mooching and about them placing a priority on pleasure vs. their economic stability. If they want to do that, fine, but not on your dime or in your house. Tell her that, if they take the trip, you will be putting their belongings in storage, for which you will pay the first month's fee and you will give them the keys for when they return home. If they don't take the trip, she can take the time while he's away to find affordable housing and pack. She has 30 days to vacate. Change your locks.
You don't have a friendship here - you have a former friend who has decided to mooch off you so she can afford vacations. There's a reason they lost their prior housing - not sure what, perhaps too much partying and vacationing?
If you think the husband is worse than creepy, but is possibly violent, then you need some additional support.
You can write a letter if you want to or if you think you will "cave" by telling her to her face, especially if she gives you a big sob story and plays on your sympathies. But this is absurd. No one can take advantage of you without your permission.
Stop trying to save a friendship that isn't there.
ETA: Just read your "So What Happened" - I think you're missing the point! THe girls can go to their father's permanently, and their mother/stepfather's stuff goes into storage during the Maui trip! Just tell her up front that this is the deal. Stop looking at this as a one-week break for you! Good heavens!