Escrow accounts often require that your account always have a minimum balance that includes a cushion amount over what you owe (varies, but rule of thumb is a minimum balance of about 2 months worth of monthly escrow payments). So if any month that year ever dips below that minimum (say, for instance, the month your annual taxes are paid), then they will increase your escrow payment for the following year to refill your account to not go below the minimum.
For a good description, here's an older DIS thread where it gets explained:
http://www.disboards.com/showthread.php?t=1219366
In short, it's a little insane. In our case, they would examine our escrow balances the month before that year's property appraisal/valuation would be released. So they always based our projected next year's cost, and ultimately our monthly required escrow payment, at last year's tax payment. If our valuation or taxes ended up being less than they'd projected for that year, then we'd end up getting a PAYMENT from our escrow account, and our mortgage payment lowered...which tended to make it a short-fall the following year! And so it was usually a year or two of an escrow payment and monthly decrease, followed by a year of a big mortgage increase. So inefficient. I learned to never spend that escrow payment on anything, but put it into savings for the inevitable increase.
And anytime I know someone who is buying a house for the first time, I make sure they are aware that this occurs. It's one of those things that catches a lot of first time homebuyers off guard.
Which is why when we refi'd we did away with escrow all together. I know escrow is a good idea if you're someone who simply can't refrain from spending the money you're supposed to save for annual taxes, but it's not a problem for us. AND we earn interest on it instead of the mortgage company.
One thing I am surprised after reading this thread is how caught-off-guard some are when their mortgage payment has gone up due to tax or insurance increases. Haven't you been getting mail about your valuations, taxes from your county, and insurance increase info from your insurance providers? Even under escrow, we always get a letter from our county appraisal office to let us know what our taxes will cost at the end of the year, and at least a month's notice from our insurance company about renewal increases. We always knew very far in advanced it was coming before it hit escrow. I don't know how it would take a mortgage payment increase to inform someone of these changes? Not challenging anyone, just not understanding if it's different in other areas?