I had the same error, i.e. "E:Can't chown/mod /system/xbin (No such file or directory)
E:Failure at line 1007: set_perm_recursive 0 2000 0755 0755 SYSTEM:xbin
Installation aborted.", but managed to fix it by creating the /system/xbin folder and putting an empty file there. Here's a guide. I DON'T TAKE ANY RESPONSIBILITY IF YOU TRY THIS ON YOUR OWN PHONE!! THIS PROCEDURE WILL WIPE ALL DATA FROM YOUR PHONE (not the sdcard though)!!
1) Go back to RUU_Hero_HTC_WWE_2.73.405.5_WWE_release_signed_NoDriver.exe by powering up the phone while holding the "back" button. When in fastboot mode plug in the USB and run the RUU exe.
2) Install flashrec and backup your current recovery image (very important! Updates wont install with a custom recovery image) then replace the current recovery image with recovery-RA-hero-v1.6.2.img. Follow this guide:
http://theunlockr.com/2009/08/27/how-to-root-your-htc-hero-in-one-click
3) Reboot into the new recovery image by holding "home" while pressing the power button.
4) Copy the recovery-backup.img to your computer (just to be sure you have it later on)
5) Install android-sdk.
6) Plug in the USB, open the command prompt and then run 'adb shell' in the tools folder of the sdk installation to start interactive mode.
7) Now you'll be able to run these commands as root (thanks to booting with RA recovery image):
mount -o rw -t yaffs2 /dev/block/mtdblock3 /system
mkdir -p /system/xbin
touch /system/xbin/removeme
chmod 755 /system/xbin
chmod 664 /system/xbin/removeme
exit
8) Restart phone. Verify that /system/xbin folder is present and contains removeme file
9) Restore original recovery image by using flashrec app. Just tap the "Restore Backup Image" button in flashrec.
10) Install first update (youtube player stuff)
11) Install second update (Android 2.1)
Enjoy!
Hope this helps!