I have to replace one of my housings on my 89 TII. I am considering just replacing both front and rear housings with FD housings as I understand the chroming is more durable. What do I need to take into consideration to do this?

Should not give you any problems.

Has this been attempted? I heard something about having to drill a coolant passage on the rear housing. Is this for oil for the turbo or what?

I run FD rotor housings on my TII. Only difference is that the coolant passages will not flow into the intake manifold. This is a good thing. The split on the spark plugs is a little farther apart and you can run a bit more aggressive on your split. If you run an aftermarket manifold and turbo you can do it no probs. No need to drill anything. I just routed the coolant passage that would go to the BAC valve from the rear iron to the front. If you need photos let me know. If you can't tell, I dont have any idea what stock was anymore.

I need to replace only the front housing right now. Will it cause any problem to run the front housing from the FD with the rear housing from the FC? I am porting both so the different port size will be irrelevant.

I know for sure that the plug split distance on the S5 is different from S4 Turbo housings. I'm not sure whether the FD left the spark plugs in the same location as S5, or whether they changed again. If you can afford it, you should just replace both and sell off the S5 housing.

If I recall correctly, the stock turbo is cooled through the front housing via the manifold.

You can drill the plug out of the housing or find another coolant source if your on the stock turbo.