Escrow Shortage

Escrow shortage occurs when a borrower's escrow account does not contain enough funds to cover upcoming property tax or insurance payments. The shortage is identified during the annual escrow analysis, which compares projected disbursements against the current balance and expected collections. Under RESPA, the servicer must spread the shortage repayment over at least 12 months by increasing the borrower's monthly escrow payment — they cannot demand a lump-sum cure unless the borrower agrees.

Escrow shortages are common in the secondary note market, particularly on loans where property taxes have increased due to reassessment, insurance premiums have risen, or force-placed insurance has been substituted at a higher cost than the borrower's original policy. For note investors, a shortage on a performing loan means the borrower's monthly payment will increase at the next escrow adjustment, which can strain affordability and increase default risk. When structuring a loan modification, investors should ensure the new escrow estimate accurately reflects current tax and insurance costs to avoid an immediate shortage that could destabilize the modified payment.