Dirnae: I really don't care too much about the hands issue, except that I think I will find a way so that they don't "flash" buy when changing modes from combat to cast to normal.
I've tried working with blender, and done a few tutorials, but it's just not for me, I think.
In my "experiments" I came across an interesting observation that MW engine is able to correct some crazy settings created in NifScope.
Actual representation of an NPC (maybe of a PC as well) is a "Bounding Box". This is what other NPCs "see" (if it set too high for a particular NPC all other NPCs looks up at him/her) and how NPC "senses" his/her height ("Bounding Box" set too high, NPC will look down). But I am not sure that "Bounding Box" is "responsible" in your case.
I would like also to warn you that small PC races might be not playable: they will stuck in certain areas like stairs unable to jump and run/walk.
Other NPC's are looking in the appropriate direction, so that isn't an issue, thankfully.
As to the small size and stairs issue, here's something you may be interested to know. Small races seem to get stuck when their racial size is an unmodified 0.80 or less. Once in a while a 0.85 will get stuck, but not often. Less than 0.85 they almost always get stuck, but there is a cure. Using the setscale to reduce them will cross a "threshold" where movement is unrestricted.
This race I'm working on is set at 0.5 racial and then scaled to 0.4 of that. Collision works a little strangely on some floor surfaces when not flying or you intentionally try to fly through the floor. You drop into an area where you can see what lies both below and above you, and 3rd person view shows only the top of the head sticking out above the floor.
To create a halfling sized race (more or less) You can set the racial height to 0.85 and then use a script to setscale to 0.80 of that and you you have a small race without stair issues.