Ok, I just found the solution Thank God
You see how with the new update the icons move as you tilt the phone to give you that "fancy" 3D look, well because of this the wallpaper gets distorted.
I turned this option off, and the wallpaper resizing issue went away
Here is how to turn that dumb 3D option off (which also drains your battery):
Navigate to the iOS 7 Settings -> General -> Accessibility -> Reduce Motion -> ON
Yep, that's all.
Another work around, go into the photos app and choose your wallpaper from there. Choose the pic then 'send' it to be wallpaper by tapping on the box with the arrow poking out of it. You can have a bit more control that way.
Also, the higher resolution picture you choose the better result you will have.