As I said before, my experience with it is with knitting. Knitters will felt a knitted work to make the fabric thicker. Mostly we do it with things like bags and hats. The particles of the wool bind together when you put in the hot water, making it so you can't really see the individual stiches as much. If you google felted wool you can see some pictures of works before and after.
As for the blankets, I would guess washing them in the hot water would felt them. You don't dry them, just wash them in hot and let them air dry.