illegal in iceland?

So, my last work and residence permit ran out on April 30th. I applied for the latest one-year extension two months ago, but the opaque and impenetrable one-two punch of Útlendingastofnun-Vinnumálastofnun still hasn't issued an extension or indeed any acknowledgement of receipt of the application. And there's not much I can do besides hassle my HR department to in turn hassle the weary workers at these government agencies. It's always like this and then one day a magical letter appears and my permit gets extended. Up until this cycle, the letter has always appeared before the old one ran out.

I was a little worried about this situation, given that I was leaving the country and would have to re-enter yesterday, permitless. I was ready to be segregated and hot-boxed at Keflavík in a tiny room with some empty styrofoam cups, bright fluorescents, and folding chairs, then shipped out on the next US-bound flight. Instead it happened like this:

Me: (handing over U.S. passport) "Góðan daginn."
Lögreglumaður: "Þú talar íslensku!"
Me: "Já, ég bý á Íslandi."
Hann: (flipping through passport, stopping on expired residence permit) "Þetta rennir út."
Me: "Já, ég veit það, er búinn að sækja um framlenging."
Hann: "Já, já, ég er bara að segja..." (Ka-Chunk!)

***

For the non-Icelandic readers:

Me: "Good day."
Immigration guy: "You speak Icelandic!"
Me: "Yes, I live in Iceland."
Him: "This has run out."
Me: "Yeah, I know, I have applied for an extension."
Him: "Yeah, yeah, I'm just saying..." (Ka-Chunk!)

...and I was in.