Time.
It heals all wounds.
Mike mellowed just as he hardened; he realized one of his own worst fears - he lost his family. I'd guess he let Kay back into their kids' lives a few years after Part II ended, and I'd also guess that the guilt of his part in Fredo's death played a part in this.
Of course it can also be explained that the change was due to Part III coming out and they needed a new storyline, but that'd be a smartass assertion.
SC is right. Michael asked his mother if one could ever lose one's family. So, even then he had familial concerns that were, unfortunately, overcome at the time by his avarice. His mother reponded that you never lose your family which probably gave Michael hope later on that, despite his avarice, he could retrieve his family. Call it an epiphany if you will, but it came out the same. Regret also figures in. He came to realize that his father would never have done some of the things Michael did that defeated the whole purpose that Vito pursued (even if warped to some extent): protection of his family. Of course, fratricide - Madonne!
