Okay, I have the closest thing to a fix on iPads with Retina display that is going to at least going to keep your images from looking grainy/blurry/jpg artifact-y. I downloaded one of the stock wallpapers that comes with iOS 7 from here. If you open this file in Photoshop and check the dimensions, the file is 2048x2048 at - and this is important - 143.9px, NOT 72px dpi. Create a wallpaper template at 2448x2448 at 143.9px dpi. When pasting in your art/photo/type, make sure that everything you want to see in either aspect (landscape or portrait) is no wider than 2048x2048 in the center of the template. When you select this wallpaper in the Wallpaper selection settings while in portrait mode, the wallpaper will scale the image at 100% to fit the screen height, while cutting off the extra 200px on either side from the width. Resize or move as necessary. The biggest issue is that the setup CANNOT use a different scale/placement when displaying in landscape - it uses the same stats from the portrait settings. However, by doing this, you at least keep the wallpaper from upsizing, which degrades the art/image; and you at least get control back of wallpaper placement in the portrait aspect. You can also do this while in landscape mode if you're more concerned with how it looks in that aspect. There didn't seem to be any difference of behavior whether Reduce Motion was on or off, but YMMV - when I did these steps, I started with it on, then switched it off after the fact and nothing changed.
I think the reason the stock wallpapers don't blow up or allow you to move them around is because for some reason, it scales the wallpaper to fit height in portrait and width in landscape, and then, the OS picks placement based on what Ives or somebody decided was best (which may just be "center it"). So it's not really working "correctly," it just gives you that illusion. Maybe it's hardcoded into the app, or there's some metadata in the stock wallpaper itself that indicates to the OS that it's stock and where to place it.
