Yeah it's stupid. For some reason they removed the Camera Roll Album in iOS 8, and replaced it with "Recently Added" So apps that use the camera roll to access all your pictures no only see the "recent" album. Oddly enough though Messages is able to pull up all your photos, so I assume that other Apps will be able to once they are updated. It's still weird that one Apple App can access all photos, and Wallpaper can't.
Anyway to solve your problem, just go to the photos view, select the photo you want as a wallpaper, bring up the share sheet, and tap "set as wallpaper"