If your DH is saying using her name as a middle name is not an option, then he's not really giving you an option at all, which leaves no room for compromise. From your post, it sounds like he's adamant that DD's name will be his mom's name and you need to find a way to be okay with it, and that's entirely unfair. You should have equal say and I think the middle name is a fair compromise. Compromise means you may not get what you want, and DH may not get what he wants. It doesn't mean someone backs down and gives in (which is what it sounds like he wants you to do).
You say you're feeling selfish by taking this right away from him, but in refusing to compromise, he's taking the same right away from you. You're not saying he can't honor his mom, you're just saying you don't like the name choice for a first name and asking him to find another way to honor his mom (which makes the middle choice a perfect option, IMO).
Anyway, FWIW, DH and I made a long list of names we liked. Maybe make a long list of names you like (include his mom's name as middle names in the list if you wish). While you're at it, to be fair, maybe pick a few middle names to match his mom's. Put the list where you both will see it regularly and see if any of them grow on you over time. Don't cross any off for awhile. Encourage your DH to add names (other than his mom's) that he might like. And maybe when it's closer to the due date, you might be able to reach an agreement.