An escrow shortage is the gap between what is actually sitting in your escrow account and what your servicer calculated should be there when it ran its annual analysis. It usually shows up as a higher monthly mortgage payment.
Where you'll see it
In the annual escrow account statement your servicer sends, and usually in a letter announcing that your monthly payment is going up. Your principal and interest generally stay the same — the escrow portion is the part that moves.
The rule behind it
Shortage means an amount by which a current escrow account balance falls short of the target balance at the time of escrow analysis.
The servicer may require the borrower to repay the shortage in equal monthly payments over at least a 12-month period.
The servicer shall notify the borrower at least once during the escrow account computation year if there is a shortage or deficiency in the escrow account.
One thing worth reading carefully: the 12-month spread is written as one of the options the rule gives the servicer. The regulation frames it as the servicer's choice among several courses of action — not as something the borrower can demand. Asking which option they applied is a fair question; the text doesn't give you a veto over it.
Consumer info, not financial advice.