As long as you have
water flow when your
engine is running then you are fine. Of course you want more than a tiny trickle of
water.
It looks like pretty normal metal oxidation from the heat and being right at the waterline. Try some spray on rust remover and see if that helps. For the stubborn oxidation use some
stainless steel metal polish that you rub on and then use some
elbow grease to polish it out.
One trick is to move some weight up on the bow so your transom comes up a little higher which will allow you to polish the lower portion out of the water.