There are rare situations where a bank will rent back to the owners foreclosed upon when extenuating circumstances exist (health, children, etc). There are rumors that banks are considering this more and more but it runs head into liability issues and most banks/lenders and their attorneys are not prepared to be landlords.
Generally, the foreclosed owner is presented with "cash for keys" by a REO agent, sheriff, or the like. The owner may have hours or days to vacate. Typically hours, since the bank does not want the owner to have time to "trash" the place.
If the bank/lender has not yet foreclosed, and the house is being short sold, the owner can remain on the property until title changes to the new owner. This may be the situation here.
Contact a local real estate professional to help you find out more details about this specific home.
In many instances the banks would rather see someone still occupying a home vs having to deal with an empty or abandoned home that can be easily vandalized, or left sitting empty if not being used to cook Meth or cultivate pot.
I answered this question on another thread but I'm not sure which one you'll be referring back to so I'll post it here as well.
I actually know a developer who has been living in a 5 million dollar (10 mil prior to the bubble burst) 10,000sf home on a 10 acre parcel in Rancho Santa Fe and has never made one payment on it to this day. How you say? He planted grapevines and landscaped so beautifully that the bank concluded it would be better to have him stay on the property as a custodian and maintain the property as opposed to having it sit empty and end up losing millions of dollars for lack of maintenance in the process.
This is one case where the banks didn't actually walk all over their own lips. Not suggesting its right but what else are you going to do?
I know it doesn't answer your question, but this circumstance - if it's a growing phenomenon - leads me to think that sales of REOs are either slowing or the banks are coming around to the realization that foreclosing is a long and not profitable ordeal.
They have the option to foreclose later. So, the pressure is on the previous owners to work a new deal or move.
What I take from all the analysis is that the banks are under even more pressure. They have to move inventory. They either inherit more inventory or they find more revenue streams. More inventory is not helping their cause.