I'm afraid it is big.
Liara's advice was wise and compassionate. I hope that it does go well when you talk to her.
That's the best case. But I think you have to plan for worst case too; try to forsee what might happen and try to work out how to deal with it.
You clearly want to stay in touch with her and have the lovely closeness you've had til now. If you don't say anything, then that won't happen. Either things will build up til there's an explosion or your husband put this foot down or you will be swallowed up by her. It sounds to me as if you were already very uneasy about the way she was engulfing your small son, so this is a real possibility.
She's had an awful time, she is going off the rails a bit and if you don't face it now it will only get worse. I'm even slightly afraid she might take your child for a while. I most certainly wouldn't leave her alone with him.
Either way, I'm afraid that the warmth of the friendship might be ruined a while. Not your fault and not hers, not really, she doesn't sound in a good mental place atm, but sometimes very sad things happen.
I would try Liara's way. Offer to help with talking to doctors etc, show how much you care, but you do need to draw very firm lines and say exactly what you find acceptable and what not. No saying that 'he feels like hers', no trying to take over the mother's role in comforting and no special little nicknames. The last may sound harmless but her boundaries are very broken atm and at this point, she needs to be meticulous in not treating him in a special way. Hopefully if she's willing to listen at all (and she may not be, in which case, sorry, you'll need to back well away) then you can explain this gently and compassionately.
I would speak to her when your husband is there too. Cancel tomorrow's baby group and if she asks why, say that we need to speak to you. Arrange an evening for it when your husband is there too. Hopefully he will calm down and see what an awful situation she's in atm and how it's affecting her. It would help if he can stay calm during the talk. It woudl be best if your baby is not in the house at the time but at grandma's instead but really at 3 months that's not possible I'm guessing. This needs to be done in your house, on your territory btw.
It is sadly possible that it all goes south and that she cannot or will not listen to you. I'm sorry, but you do need to face the possibility that your closeness cannot continue. If that happens, you will need to mourn the loss of the closeness and to grieve for the very valuable friendship you have. It may be that she can't handle it at the time but comes around later when she is well again and you can rebuild, if it does go wrong.
This is so very sad. I hope that it can be resolved well for all your sakes.