I don't believe it is illegal.
Some may argue it is unethical or the banks won't allow it, but the answer all depends on who you ask.
However I have never seen a bank issue a short sale approval letter that states it must be an arms length transaction.
Now I am not suggesting that everyone should run out and have their relatives buy their overleveraged property. I'm just saying I don't see how it is illegal unless the bank specifically says in writing it is prohibited.
If the bank has not prohibited it, and they approve the sale, and you have done nothing to hide the fact that your brother is buying what exactly is illegal about it?