Honestly? (And yes, I am mom to FOUR daughters.) Tough love. I would have kicked her out at the beginning of pregnancy and let her live with her choice. There are many many homes for unwed mamas that probably would have done her a great deal of good - she very likely would have placed her child for adoption or would have gotten a GED and some job training skills as often kids tend to behave better for people other than their parents. At this point it is harder because baby is a reality and you are obviously attached as any grandparent would be, but also overattached because you are acting as the other parent de facto, even though you aren't responsible or entitled to those rights. I think if I were in your shoes, and I have really thought about this because my own parents went through this with my sister, TWICE - I think I would try to help her find a job and low income housing. Tough love but with a bit of parental guidance. Offer her two options : one, you will kick her and child out at the end of the month, period, or two, she will get her GED and a job within ninety days and will move out in that same time period. No other options.
You won't get the baby, Grandma. I know you love the baby and somewhere deep down you are replacing your daughter with the sweet and innocent and easier to love baby, but the baby is not yours. It belongs to your child. Keep that perspective in every action you take. When you see your daughter taking these naps (believe it or not, my sis did this as well), pour cold water on your daughter. When your daughter stays on the phone instead of taking care of her child, remove all phones from the house. Let your 17 year old see what happens every time, as this may serve an important lesson to the little madam. When your daughter wants to "go out" leave the house with all the kids, every time. Take all keys, so she has no way to go. This seems harsh, but this little girl, your child, has not been raised totally. It is time to take her off the t**, but you don't replace her with another child so that you don't have to feel the guilt. You continue to raise your child, so she can raise HERS.
Best luck, believe it or not my family has walked right where you are. Three years later my sister and her two children are thriving. She is a loving mother, not perfect, but so much better and more mature than she was. She lives in a small (300 sq ft max) house my dad built on the back of their small property, with both of her kids. The cost of building that small house was much less than any lawsuit, and now my sister can and must parent her children. Your daughter must be forced into the same thing, or you can kiss grandbaby goodbye to foster care.
Steph