It wouldn't recurse (the unions are built from what exists at mount time, not from what results from it), but you'd run into problems like with files being already open and becoming shadowed by the mount (to name one of the problems). While the running app would still read and write from/to the old location, all later opens would access the new one.

This could be solved by mounting at a very early stage (as Knoppix does). However, especially with software updates from Nokia, this could cause more grief than what you'd gain from it, so I (I'm the one who wrote it) decided to suggest using it for subtrees of the root FS only.