Unless somebody else chimes in with better information, I'd say the problem may be with the vacuum system. When the system isn't working properly - or has no vaccum - the settings default to defrost, the safest setting for driver visibility. Try tracing the vacuum circuit from engine to dashboard.
Which reminds me... When the fan switch is completely off (at the 6:00 position) I hear a hissing sound coming from the center console. But it disappears when I set the switch to the 7:30 position (one click away from speed 1. Does that indicate any sort of problem? If yes, what can I do about it?