Your MIL is a bully, an emotional abuser, your DH is a product of emotional abuse.
When your MIL announced she did not like you it was meant to be your cue to throw yourself at her feet and beg for mercy, to be allowed to be "approved" by her and acknowledge her all-powerfulness. Your FIL and DH are already trained to do this.
By not begging for mercy or adoring her and abasing yourself in front of her you are her enemy - you are implying she may be at fault. This is something she cannot have. Statements like you must admit to mental illness are part of her obsessive need for control and personal feeling of superiority - nothing can ever be the fault of your MIL - you having a mental illness is preferable, you dying in agony is preferable to the insinuation that she can in any way be at fault.
Phoning your mother to berate her for your upbringing is classic external blame excuse - the problem is SOME ONE ELSE, it cannot be your MIL at fault, she truly believes she is perfect, and your FIL and DH back her up in this. Your mother would have been expected to admit her short comings - she didn't, hence repeated attempts to get your mother to take the blame.
The only relationship possible with such a personality type is non contact - she is unable to function normally or have any concept of normal social relationships. She has surrounded herself with people who prop up that image.
My paternal grandmother was like this, she persecuted my mother her whole life - and never missed an opportunity to tell me how shit my parents were. I stopped seeing my bitch gran in my teens. My mother kept up the politeness and it caused huge problems with my parent's marriage.
When my mother was dying she said to my father "why did you never defend me in front of your mother?". Gran had been dead 12 years at that point. That's how poisonous it was.
Go no contact and don't let your kids near her.
Your DH needs to work out he has abusive parents, and he must do it for himself "he only wants a quiet life" - yes, he's been well trained.