This is usually required on a property that HUD is selling. There are certain damages to the house that are being required to have repaired for closing. The estimate for those repairs are added to the purchase price and included in your mortgage. The money for the repairs is held in an escrow account and paid directly to the licensed contractor once the repairs are completed.
An account set aside for the repairs to be made - usually with an attorney's office in this area. Once they are proven to have been made, then those funds are paid out to one doing the repairs. In most cases, the repairs have to be done by a licensed individual (not your Uncle Joey and Brother Sid).
Think of escrow as security money--the money is usually paid out once the damages are proven repaired--sometimes the money is released in a lump sum, other times in increments, depending on the situation and or contract.
An escrow account is just another way of saying that someone is holding money that doesn't belong to them. Money is being held to cover the cost of the repairs and when the repairs are completed, that money will be released to whomever paid for them (or directly to the contractor in some cases).
If this is a HUD house, click on the link below and scroll down to point #4 for more information about how it works.