Personally, I would breed my grade mare. My mare is actually a purebred QH, I know all of her bloodlines... the only reason she hasn't been registered was because her mama died before her mama's registration papers were acquired... I'm looking more into the situation this morning, but as it looks so far; she can't be registered.
I'm personally impressed with her bloodlines, her temperament is a dream, conformation is beautiful... I'd go for it. I may not be able to register the foal in a breed association, but as long as it's kept for a personal horse I see absolutely no harm in doing so... it's not like I'm running a huge breeding farm or claiming to have or aiming towards high quality show horses.
You can't ride papers... but usually you can't sell a horse without them... unless they've done something impressive. To each his own. If you have a good mare you know a little about, at least her background, I see no harm.