Imagine starting out as a member of a faction that is a part of the faction of your race. Based on what you attacked and what quests you completed, you'd be able to gain or lower factions in the other races. A human can become friendly with the undead and complete undead quests.
It's a great idea. There is nothing better than playing in the real world and meeting random players who are friendly or hostile. It's bizarre to me that an mmo would go so hard to the point of small organized groups in instances that have no connection to the outside world.