I am very sorry for the loss you and your family have suffered. Child custody can be an emotional roller-coaster in the best of circumstances, and your situation is very difficult.
Your brother is right to focus on the criminal charges he is facing. As much as he may love his son and step-daughter, he won't be able to do much for them if he ends up in prison. And I can only imagine that your sister-in-law is dealing with an enormous burden of grief that colors all that she says and does. Since both mom and dad are under enormous pressure right now, the two surviving children need advocates whose first and foremost priority is their welfare. Hopefully you and your family will help with this role.
When NC courts have to make decisions about child custody, the principal issue is the "best interests" of the children. Children are almost always placed with either mom or dad, if either is a fit parent. Placement with grandparents is common, especially if mom lives with them. Placement with uncles or aunts is less common.
When the court has to determine what the best interests are, in addition to the parents, it turns to DSS and the child's guardian ad litem. As you know, DSS tends to focus on the parents' fitness, and makes recommendations about the most efficient way to satisfy legal requirements.
The court can assign an independent lay volunteer to be the legal advocate for the children as their guardian ad litem. The GAL collects information about resources in the community and close by family, conducts an independent evaluation of the situation, and presents his or her recommendations to the court - which usually considers GAL recommendations favorably. If the court has not already appointed a GAL for these children, you may want to use your energies to encourage such an appointment. The NC Courts website has a listing of GAL offices and contact information. Call the office closest to the children's home, and ask how to get a GAL appointed. http://www.nccourts.org/Citizens/GAL/
The best thing you can do for the children is, most likely, to cooperate with DSS and the GAL in every way possible. Feel free to ask them questions about the process, and offer whatever assistance you can. The more these folks see you as helpful and supportive, the more likely they will keep you in the loop. And, unless you observe fairly objectionable conduct on the part of DSS or the court, it is unlikely that you will have standing to object to the court's decision regarding custody.
One final comment. Most courts will try to keep siblings together, even if they are half-siblings. As between your family (only one child is blood kin) and mom's family (both children are blood kin), a court may prefer her family. This would especially be true if mom is going to be in the home providing care for the children. If the court does this, please do not take it personally. But please continue to do everything you can to support your brother and, especially, help his kids.