Good for your nephew

I'd tell the nephew that absolutely no one is locking him in his room for being gay, bi, trans, or anything else. But it sounds like the nephew already knows better than to judge someone for their sexual orientation or identity.

I'd tell the MIL to never ever speak that way in front of my child. If she wants to be an ignorant bigot then keep it to herself.

I am gay, and if I were in your nephew's place (and gay) in that conversation, I most likely still would have denied being gay to someone that openly hostile. Regardless, good for him for being cool with the issues.
If I were in your place, I could not let that bigotry go unchallenged. Each person has to figure their own best approach, of course, but I would challenge those ignorant and hateful statements every time she opened her mouth. If the boys seemed to be holding their own well with her, I would not necessarily banish her, but she might end up wanting to banish herself just to get some rest from being told how ignorant she is.

She should not be allowed to spend time with the kids.. it's torturous to children RIP bee torn between basic human rights and the love they have for her..

MIL needs to mind her own business!!!

My son is bisexual. He wants to come out properly, but he can't because of his grandfather (my ex's dad.) My son put 'in a relationship' on Facebook, and ended up being quizzed by his grandparents. He had to make up a story about a long-distance Internet thing with some random, fictional girl.

Bear in mind that this is the guy who walked up to me (while I was sitting in my car) called me a "filthy pervert" and punched me in the arm, all because I took my son to a Pride event. Even I begrudgingly agree that it's best if he doesn't find out until he absolutely has to.

Also, " I'd lock you in your room until you changed your mind. That's what we told your father."??? This speaks volumes about her character and mentality as a human being... and it doesn't speak highly of either.

I think your hubby needs to have a long talk with his momma about being a bigot around your kid.

Geez, what can be said about a homophobe, except that she has issues herself.