Critics of a proposal to lower the limits said some higher-priced markets, specifically much of California, would be unfairly impacted by such a move.
Watt, a former North Carolina congressman, also said he would try to alleviate some of the uncertainty banks face in dealing with Fannie and Freddie.
"I know that repurchase risk remains a top concern for the mortgage industry. Lenders believe that too much uncertainty still exists in this area for them to ease their credit overlays. Ultimately, this undermines the goal of improving access to mortgage credit for creditworthy borrowers," he said.
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Watt will therefore relax the payment history requirements for banks to get relief from buybacks and also get more clarity on which loans have passed a "quality control."
Watt also continued to push a common securitization platform for Fannie and Freddie, which don't originate loans but do securitize them. The two currently issue separate securities.
The moves appear to signal that Watt is placing more emphasis on credit eligibility, while his predecessor focused on protecting and shrinking Fannie Mae and Freddie Mac. Watt's announcements could reduce costs for both banks and borrowers.
In another move to open up credit to first-time homebuyers specifically, HUD Secretary Shaun Donovan announced a new four-year pilot program at the Federal Housing Administration (FHA) starting this fall. The FHA is the government mortgage insurer for low down payment loans.
Under the program, first-time homebuyers who commit to credit counseling will qualify for reduced FHA insurance premiums on their loans. For the average FHA loan balance of $180,000—these reductions, according to Donovan, can add up to roughly $10,000 in savings over the life of the loan.
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"We want to create an environment that encourages responsible behavior—and provides clear rules of the road—so lenders can originate loans without inappropriate fear of penalty for who they lend to," said Donovan in prepared remarks to the National Association of Realtors.
Both of Tuesday's announcements are designed to not only ease some credit conditions but also to make loans more affordable. The news comes as home prices, fueled by an inordinately high number of all-cash buyers, continue to see strong gains. Affordability has weakened dramatically in just the past year amid higher mortgage rates.
The middle class is being hit disproportionately hard, especially in larger metropolitan areas, according to a new report from Trulia. Just 14 percent of homes for sale are within reach of the middle class in San Francisco, versus 20 percent a year ago, according to Trulia. Even the most affordable markets, like Akron, Ohio, are also seeing deterioration. Trulia based its findings on the monthly cost of homeownership making up 31 percent or less of a household's monthly income.
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Analysts at Goldman Sachs also claim, "housing is not as affordable as it looks." Instead of looking at families with median incomes buying median-priced homes, which is how the Realtors survey affordability, they looked at the "marginal" homebuyer, who they claim determines house prices. The marginal buyer may not necessarily have the median income, buy the median-priced house and afford a 20 percent down payment. The marginal buyer is also likely a first-time homebuyer.
While the Realtors claim housing is still very affordable, the Goldman Sachs analysts show housing is closer to historical averages of affordability. Marginal buyers may be using FHA loans, which currently hold those higher premiums.
It all ties back to why the FHA is now reassessing the costs of its loans. With potential first-time borrowers facing higher levels of student loan debt and damaged credit scores, they cannot qualify for the lowest mortgage rates and they will likely need mortgage insurance. The new policies announced Tuesday, while not dramatic, may finally open the door a crack to more homebuyers.